Tech stocks have plummeted in 2022 - here’s why
Stock market-listed technology companies the world over have seen their share prices plummet in the first few weeks of 2022, as concerns over rising inflation scare off investors.
The NASDAQ 100 Technology index, which includes gigantic names like Apple, Microsoft and Google’s owner Alphabet, shed 12 per cent of its value in the first 21 days of 2022.
The unusually sluggish start to the year for technology stocks comes amid ongoing concerns about rising inflation and interest rates around the world, as the COVID-19 pandemic continues to bite.
Also read: Sound the inflation alarm: Interest rates need to rise
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Most of the world’s major stock market indices have slid downhill, including the NASDAQ 100, FTSE 100, ASX 200, Dow Jones Industrial Average, Nikkei 225, while cryptocurrencies are also experiencing a fallow period.
But technology stocks have copped it the hardest. So far this year, Netflix has lost 33 per cent of its value, Amazon 16 per cent, Microsoft 12 per cent and Alphabet 10 per cent.
George Lucas, the joint CEO of Australian fintech investment platform Raiz, told Yahoo Finance the slow start was a reflection of market concerns.
“Times are changing as countries reopen,” he said.
“Central banks are becoming less accommodative to support economies and are preparing to hike interest rates.
“In my opinion, it has got a lot to do with liquidity. Towards the end of last year, as inflation increased, cash began to get more expensive. Economies began to open up and banks became more worried about inflation, worried that what we’re seeing is not transitory.
“These changes are now being absorbed by the equity and bond markets and have contributed to the recent sell-off in global bonds, a sell-off in technology stocks and a sell-off in shares of non-profitable companies.”
What does this have to do with inflation?
At present, Australia's official interest rate - also known as the cash rate - is sitting at 0.10 per cent, a historic low.
However, the Reserve Bank of Australia is widely tipped to increase the cash rate; something that has not occurred since November, 2010.
As covered recently by Yahoo Finance, one of Australia’s big four banks, Westpac, is predicting the RBA will increase the interest rate in August, despite RBA assurances it won't raise the rate until at least 2023.
Westpac chief economist Bill Evans said developments in the economy prompted the bank to bring forward its prediction.
“We now expect one hike of 15 basis points in August, to be followed by a further hike of 25 basis points in October,” he said.
That would take the official cash rate to 0.5 per cent.
Inflation rates began to rise late last year. In November, Australian government bond yields rose to two-year highs on the back of a 0.8 per cent increase in the consumer price index (CPI) in the three months to September.
The annual change in the CPI is used as a measure of inflation. The latest CPI figures are due out from the Australian Bureau of Statistics on Tuesday.
In the three months to September 2021, the annual CPI inflation rate rose to 3 per cent.
Why have tech stocks felt the burden?
Other sectors of the stock market have been somewhat insulated from the big global sell-offs. The S&P Global Mining Index has gained 2 per cent this year, while the Dow Jones Oil and Gas Index has increased by an extraordinary 11 per cent.
And while Lucas said there was no reason to panic if you were a tech investor, there were attributes to technology companies that made them vulnerable to the current “market rotation”.
“There are a lot of technology companies that are very profitable and they have been trading at very high valuations for a long time,” he explained.
“People are attracted to tech companies because they can make you a lot of money very quickly; you don’t have to wait 20-plus years for a mine to start producing or a biotech to get a drug approved.
“However, many tech companies are cash-flow negative and so they rely on their ability to raise capital quickly, which has fuelled this sell-off.
“If a company is constantly burning cash, but central banks and investors are becoming more concerned about the rising cost of cash, where are companies going to raise their money from?”
But don’t fear a dot-com bubble
Falling share prices in the tech sector might bring to mind the infamous dot.com bubble, which saw tech companies rise astronomically in value in the late 90s and early 00s, only to lose the vast majority of their gains by 2002.
But Lucas said tech lovers need not be worried, describing the current sell-off in the tech sector as a market rotation that would turn around.
“Most tech stocks have been sold off in line with what’s happening, but over the next 12 to 18 months, these knee-jerk reactions will calm down,” he said.
“There are plenty of tech companies with solid fundamentals, strong revenue growth and consistent returns for their customers.
“I think we’re going to see growth in the sector with more mergers and acquisitions, which we’ve already seen recently with Afterpay and Block.
“We’ll see growth as companies merge, rather than spending heaps of cash and competing against each other.”
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