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Tech-heads fear that the so-called tech bubble is about to burst in their faces. They have reason to be afraid. Tech stocks are down more than 30% this year, while private equity startups are suffering from a lack of confidence.
Elsewhere, cryptocurrencies are swinging left and right, with exchanges like Celsius coming close to bankruptcy. Investors are reluctant to venture into new and untried ventures when market conditions show no signs of improvement, tightening their pockets.
The question is if things are really as bad as they seem.
Why do things look so ugly?
A rotten mix of factors has contributed to a pessimistic view of the industry and raised fears of a catastrophic tech bubble bursting.
Russia’s unjust invasion of Ukraine, the end of the pandemic, the threat of revenue regulation and the increasingly high interest rates have exacerbated the situation.
said Laura Petron, principal analyst at GlobalData. The verdict“In recent years, the technology market has grown due to unique and difficult to replicate conditions.
“These include historically low interest rates and, more recently, the Covid-19 pandemic. Companies like Netflix and Peloton have grown rapidly for both reasons, while companies like Uber have benefited from a decade of low interest rates and high VC investment during the pandemic.
But it looks like this covid boom is coming to an end in a big way. Even Amazon founder Jeff Bezos has warned that the rapid growth of the pandemic will soon end the party days.
The looming warning comes as several large tech companies announce job cuts. Google, Apple and Microsoft have reportedly stopped hiring. Even Facebook owner Meta — who has been promising to rocket us into the Metaverse — has suspended hiring until further notice.
Meta CFO David Wenner said the company “is responsible for responding to the unexpected market forces that have put pressure on our business over the past few months.”
The pressure to share some of the issues mentioned above that experts feel are contributing to the bursting of the bubble — including the violent war between Russia and Ukraine and a return to pre-Covid habits.
Stocks rise and fall in the technology industry
Another fundamental reason for the tech bubble to appear to be about to pop is the overvaluation of the industry.
Analysts say the dramatic declines in companies such as Tesla, which was valued at a record high of 1tn last year, are signs of a market correction.
Publicly traded companies that once played high-tech stocks are seeing their shares fall precipitously.
Peloton, once touted as the ultimate winner of the pandemic, is now said to have lost more than 90 percent of its value since its peak.
Other businesses that have thrived on the coronavirus, such as Zoom, a video conferencing service, are down from $54 billion to $27 billion since the beginning of this year.
Privately held companies didn’t escape the pain either, as the valuation of pay-as-you-go giant Klarna fell 85 percent last week.
The Swedish fintech company has announced that it has raised $800 million in funding from investors valued at $6.7 billion. That’s a big drop from the $45.6 billion it got in 2021.
This massive investment hammer fall has eroded investor confidence in high-tech stocks, fueling fears of a tech bubble crisis.
This volatile market was too much for some companies and caused them to close or file for bankruptcy.
US crypto lender Celsius filed for bankruptcy in July, saying it is currently down to $167m in “cash on hand”, a far cry from its claim to have $25bn in assets under management by October 2021.
The fintech startup’s rapid marketing campaign, though forced to shut down operations earlier this year, raised more than $124.5 million in total.
Leon Gauman, CSO and CPO of digital transformation consultancy Elsewhen, said earlier. The verdict: “Fast is another example of the era when the grinding of cheap money has stopped.
With the assumption that it didn’t need to be a separate product, it quickly entered a new, growing payments market led by true incumbents like Checkout.com and Stripe.
As stocks in technology businesses continue to fall across the industry, the crypto market has experienced its own devastating downturn.
Since November, the total value of all cryptocurrencies has dropped from $3tn to $1tn. This “crisis” is linked to other factors at play in the broader market – Russia’s invasion of Ukraine and rising inflation.
It has seen other market stakeholders lose faith in the nascent industry. This week it was announced that Tesla has disposed of 75% of its bitcoin holdings. The electric car company led by Elon Musk announced a $1.5 billion acquisition of its digital asset in February 2021.
Is there good news for technology?
Although this all sounds doom and gloom, some industries remain promising for the future.
Henrik Grimm, seasoned investor and now European MD for startup founder funding Capchase, believes this downturn will not be as bad as previous tech bubble bursts – like the dotcom boom in its early years.
“We need to understand that this downturn will not be like the bursting of previous tech bubbles,” Grim said. The verdict. Europe and America both have very broad and deep technology industries.
Grim argues that the risk of a global collapse is “significantly reduced” due to the many different business models currently in play.
“Crucially, there is now a very large alternative finance industry that provides a way for startups to secure capital when VC funding dries up,” he said.
Petron echoes his sentiments, believing that the focus should be less on whether the technology bubble will burst and more on “how the technology sector is adjusting to the profound changes” in the market.
“I think investor strategies focus on profitability and a company’s ability to generate cash flow,” Petron said.
“In this context, gig economy companies feel pressure to adapt and change, and they are also subject to increased scrutiny.”
Big tech companies such as Apple, Alphabet and Meta will continue to have strong profitability despite the war in Ukraine and challenges in China’s supply chain, Petron reported.
“Despite these concerns, most Big Tech results were very strong in Q1 2022,” she told us.
“These companies will continue to be leaders in social media, e-commerce and other consumer markets and shape the future of work.”
GlobalData is the parent company of Vedict and its sister publications.
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