Extreme caution necessary when investing in profitless tech stocks as prices plummet

An attendee wears a Samsung Electronics Co. Gear VR virtual reality headset during a media event in Seoul, South Korea, on Thursday, March 10, 2016. Photographer: SeongJoon Cho/Bloomberg.

An attendee wears a Samsung Electronics Co. Gear VR virtual reality headset during a media event in Seoul, South Korea, on Thursday, March 10, 2016. Photographer: SeongJoon Cho/Bloomberg.

Published Jul 19, 2022

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Tech stock share prices, prized as investments through the pandemic and earlier, have fallen dramatically over the last eight months with the Nasdaq down almost 27 percent year to date.

PSG Wealth’s portfolio manager Schalk Louw said a pertinent question was whether “we are seeing a repeat of the Dot Com crash of 2000.”

He said the crash was the result of three major themes: tech stocks were trading at extremely high valuations in the late 90’s and early 2000’s; the US Federal Reserve started to tighten monetary policy, hiking rates 6 times between June 1999 and May 2000, which resulted in an economic downturn followed by a recession.

Louw said the Nasdaq had traded at valuations last seen during the Dot Com era at the start of 2022, even though economic growth had not reached the market’s expectations.

In March, the Fed increased interest rates for the first time since 2018. The effect interest rate hikes have on both economic and earnings growth is well documented.

Another higher than anticipated 0.75 basis point hike in the interest rate by the Fed in June caused some prominent economists to believe that the US would go into recession, as was the case in the early 2000’s. The Nasdaq had its worst first half of the year on record, in 2022.

“Even after declining by almost a third off its highs, one can see that the Nasdaq is still not trading at levels that can be considered very cheap, and history has shown us how valuations can drop and stay low for some time,” warned Louw.

For example pandemic era market darlings Netflix, Shopify and Zoom were down -70 percent, -74 percent and -40 percent respectively during the first half of 2022. Mega caps Apple is down -23 percent; Microsoft is down -24 percent, while Facebook has lost -53 percent of its value this year.

Louw said “we will have to wait and see,” if the current trend continues for a long period, “but the similarities are stark and extreme caution is advised.”

Schroders Quantitative Equity Products Investment Director Aiman Shanks said “despite a strong run during the pandemic”, a good example of investors pulling out in search of growth for security, would be “profitless” tech, which had underperformed sharply in the past year alongside other high-profile casualties of excessive optimism such as Netflix.

“With a few notable exceptions, pursuing such stocks has not historically generated a sustainable source of returns and more broadly, it has not paid to continually rely upon exuberant market behaviour,” he said.

“Greater discrimination is healthy…our working assumption is that big tech has reached an equilibrium in terms of its weight in the mainstream indices and its broader influence within society; further gains or losses from here will be more stock specific in nature,” he said.

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