Winter comes to technology companies with the end of covid and the rise in rates

“We are facing an expected correction due to the very strong rise that values ​​linked to the new economy (technology, telephony and media) have registered in recent weeks.

Thomas Osborne
Thomas Osborne
13 November 2022 Sunday 00:31
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Winter comes to technology companies with the end of covid and the rise in rates

“We are facing an expected correction due to the very strong rise that values ​​linked to the new economy (technology, telephony and media) have registered in recent weeks.” This is how this newspaper collected in March 2000 the so-called puncture of the dotcom bubble, which in Spain had the Terra company as a symbol of that fall. The Nasdaq index took fifteen years to recover the levels of that time.

Today, despite last Thursday's rush, fears are growing that technology companies could experience a similar crisis. First, because of the thousands of layoffs. In many cases, this is the first time in their brief and intense history that companies like Facebook or Twitter have been forced to cut staff. Second, due to the spectacular falls in the stock market recorded in recent months, with falls approaching 35% in the last year.

The crash is even more dramatic if we remove from the Nasdaq the cream of the crop of companies that benefit from dominant positions in the market, such as Apple, Alphabet and Microsoft. For example, the Goldman Sachs index of technology companies is down nearly 70% from its highs. Analysts forecast tech sector profits to decline 0.2% next year, compared with a late-June prediction of a 10.5% rise, according to data compiled by Bloomberg Intelligence.

“The current drop in technology is largely explained by two reasons. The two factors that previously benefited them, cheap money and the pandemic, have disappeared. So in the end, to balance the accounts, they are now forced to cut jobs,” says Víctor Alvargonzález, director of strategy and founding partner of the independent advisory firm Nextep Finance.

With covid, the platform economy experienced its peculiar boom. From e-commerce to streaming. But firms like Zoom or Netflix currently accumulate annual losses on the stock market close to 60%.

As for the recent rise in rates on a global scale, especially in the US, it is going to be a blow because many startups that need to burn a lot of money at the beginning of their business to start. A money that will now be more expensive to repay when interest rates increase. “Even so, we must distinguish –adds Alvargonzález–. We are in a very different situation than in 2000 and the dotcoms. Now, most companies have income and many of them have come to make a profit, so we are facing a correction that is largely the result of the change in cycle.

Indeed, the situation, with the rise in energy prices and the war in Ukraine, is adverse, but to this crisis we must add problems in the technology business itself. Somehow, it can be said that some technology companies have reached their ceiling. In the sense that the market is already saturated.

In particular, many social networks are stagnant in terms of users. “Few new apps are coming out – with the exception of the TikTok universe – and this gives little motivation to its members. This consumer apathy ends up also being reflected in the advertising business”, underlines Enrique San Juan, CEO of Community Internet and an expert in marketing and social networks. Users are less participatory and therefore have a lower propensity to spend. "Even millennials are slowly getting older," jokes this expert.

The regulatory and tax environment remains uncertain, especially for those companies in a near-oligopoly position (as is the case with Amazon or Alphabet). From the possible introduction of tax surcharges on a global scale (such as the well-known Google tax) to the numerous legal cases and investigations in Europe and the US about possible abuse of a dominant position and violation of competition law, the clouds over the technological do not clear.

Some values ​​also experience intrinsic problems. For example, Meta (Facebook) suffers from the excess of expectations created by the metaverse. "Mark Zuckerberg himself said when he announced his strategic shift that the metaverse would become a reality in ten years," recalls San Juan. What happens is that the patience of the shareholders is not usually that long.

As for Twitter, the recent change of ownership with the arrival of Elon Musk has raised concerns among advertisers, fearful that possible changes in the content moderation policy will affect their advertising return.

The tidal wave that Twitter is experiencing has also spread to the shares of the other company of its new owner: Tesla has been dragged by the downward current. In this case, Elon Musk has had to sell part of the shares of his electric car manufacturer to pay for the purchase of the little blue bird.

Maybe we are not facing the puncture of a bubble. But this winter is going to be very cold.