The latest quarterly results show that the paint in the US technology sector is gone. But it won’t be as devastating as it was after the dot-com bubble. It’s a timely correction.
Streaming providers have to admit that their services are reaching a demand limit – the time on Netflix cannot be extended indefinitely.
The Corona digitization push is over. The technology companies and their shareholders are feeling the effects. The population is no longer mostly locked in their own homes and uses the computer less as a connection to the outside world. The sales of streaming services, e-commerce and video conferencing providers are stagnating or eroding. In order to justify the adventurous valuations in the US tech sector, solid growth rates would be necessary – especially if the financial markets expect interest rates to rise further. This makes future profits discounted into the present worth less.
But the end of the pandemic is not the only reason. Global economic prospects have clouded over, inflation is picking up, skilled workers are scarce in many places, supply chains are not running smoothly – and the war in Ukraine is fueling fears of a spreading conflict. The tech providers also have to admit that many services are reaching a demand limit – the time on Netflix, Facebook and YouTube cannot be extended indefinitely. In addition, state-controlled services from China, in which one does not want to invest, are gaining ground in this area. The budget for online purchases is also limited, and the new smartphones have steep prices but hardly any additional benefits.
After the breathtaking rise in the price of tech stocks in the past decade, investors have not felt comfortable for a long time. The advances of the US heavyweights Alphabet, Amazon, Apple, Meta, Microsoft, Netflix and Co. have for some time concealed the fact that things are no longer going so smoothly. The lofty valuation highs raised fears among many that what happened in 2000, when the dot-com bubble burst, could be repeated. But this time, it looks like the cycle will end without a big bang that will take a toll on the entire economy, as it did at the turn of the millennium.
It will only be possible to say in retrospect whether the rating correction will be less severe this time. But for the time being, the air escapes from a small hole without the bubble bursting. While numerous dot-com structures turned out to be castles in the air in 2000, the large tech companies are now showing solid earnings – without being able to maintain the previous growth. For example, the latest earnings report showed that Amazon’s growth has slipped back to post-dot-com bubble levels. Facebook has had a disappointing development in user numbers for several quarters, and Netflix also recently realized that there are not endless new streaming customers. However, demand remains good in the enterprise software, cloud computing and semiconductor sectors.
This “correction with caution” also has to do with the fact that the financial markets are currently grappling with problems that are more serious than the overvaluation of tech stocks. In addition to the geopolitical crises and energy supply bottlenecks, these are above all the sharp rise in inflation and the resulting increases in key interest rates. Already in the second half of the year, investors started to switch from growth stocks such as tech stocks to defensive stocks such as energy and consumer goods. Over the past 12 months, the tech-heavy Nasdaq Composite Index is down about 17 percent, but the S&P 500 Index is “only” about 7 percent — although big tech stocks also dominate that index. The next few months on the stock exchanges are likely to remain volatile and nerve-wracking – but that’s not just the fault of tech stocks.