Tech-heads fear that the so-called tech bubble is about to explode in their faces. They have reason to be afraid. Tech shares are down by more than 30% this year while private startups are suffering confidence-crushing down rounds.
Elsewhere, cryptocurrencies are crashing right and left, with exchanges like Celsius filing for bankruptcy. Investors have understandably tightened their purse strings, reluctant to splurge on new and untested ventures when market conditions show no sign of improving.
The question is if things are really as bad as they seem.
Why are things looking so grim?
A rotten mix of factors has contributed to the industry’s depressing outlook and fired up fears of a catastrophic tech bubble burst.
Russia’s unjust invasion of Ukraine, the end of the pandemic, the threat of incoming regulation and increasingly high-interest rates have all exacerbated the situation.
Laura Petrone, principal analyst at GlobalData, told Verdict: “Over recent years, the tech market has grown thanks to exceptional and hard-to-replicate conditions.
“These included historically low-interest rates and, more recently, the Covid-19 pandemic. Companies like Netflix and Peloton grew rapidly due to both factors, while companies like Uber suffered during the pandemic but also benefitted from a decade of low-interest rates and huge VC investment.”
But this Covid boom appears to be ending drastically. Even Amazon founder Jeff Bezos spoke out in a warning that the party days of rapid pandemic growth will be ending soon.
The looming warning comes as several large tech firms have announced hiring cuts. Google, Apple and Microsoft have reportedly halted hiring. Even Facebook-owner Meta – who has been promising to rocket us into the Metaverse – has frozen hiring until further notice.
META CFO David Wehner said that the company must “be responsible by responding to the unpredictable market forces that have put pressure on our business over the past few months”.
The pressures he was referring to share some of the aforementioned issues which experts feel are contributing to this bubble burst – the raging war between Russia and Ukraine and the return to pre-covid habits included.
Overvaluation and falling shares plaguing the tech industry
Another underlying cause for the tech bubble seemingly being about to pop is the overvaluation of the industry.
Analysts claim the dramatic fall in stock for companies like Tesla, which was valued at a whopping 1tn last year to currently just over $700bn, are the signs of a market correction.
Public traded companies once sporting high-growth tech stocks are also seeing their shares fall at a rapid rate.
Peloton, which was once hailed as the ultimate winner of the pandemic has now reportedly lost over 90% of its value since its peak.
Other coronavirus-thriving businesses like Zoom are losing big too, with the video-conference service reportedly dropping from $54bn to $27bn since the beginning of this year.
Privately owned companies haven’t escaped the suffering either, as buy-now-pay-later giant Klarna saw its valuation drop a drastic 85% last week.
The Swedish fintech company announced it raised a new $800m in funding from investors valued at $6.7bn: a huge decrease from $45.6bn it secured in 2021.
This drastic fall in investment hammers home the decrease in investor confidence in high-growth tech stocks, adding to fears of a tech bubble crisis.
This changing market has been too much for some companies and led them to close or file for bankruptcy.
US crypto lender Celsius filed for bankruptcy in July, claiming it was currently down to $167m “in cash on hand,” a long way away from their claim of having $25bn in assets under management in October 2021.
Fintech startup Fast was also forced to close operations this year despite a super-loud marketing campaign and raising over $124.5m in total.
Leon Gauhman, CSO and CPO of digital transformation consultancy Elsewhen, previously told Verdict: “Fast is another example of the era of cheap money coming to a grinding halt.
“Fast entered a new, growing payments market, spearheaded by true trailblazers such as Checkout.com and Stripe, on the assumption that it didn’t need to be a differentiated product.”
As stocks in technology businesses continue to fall across the industry, the crypto market has had a terrible crash of its own.
The total value of all cryptocurrencies has fallen from $3tn to just $1tn since November. This “crisis” has coincided with other factors playing out in the wider market – Russia’s invasion of Ukraine and rising inflation included.
It has also seen other market stakeholders lose faith in the nascent industry. This week it was revealed that Tesla has dumped 75% of its bitcoin holdings. The Elon Musk-run electric car company revealed in February 2021 that it had bought $1.5bn in the digital asset.
Any good news for tech?
While this does all seem pretty doom and gloom, some industry wonks remain hopeful for the future.
Henrik Grim, an experienced investor and now MD of Europe for startup founder funding firm Capchase, believes this downturn won’t be as bad as previous tech bubble bursts – such as the dotcom bust in the early noughties.
“We need to understand this downturn won’t be like previous tech bubble bursts,” Grim told Verdict. “Europe and the US both have much broader and deeper tech industries.”
Grim argues that the risk of an all-encompassing collapse is “severely reduced” due to a large number of different business models now at play.
“Crucially, there is now a very large alternative financing industry that provides a way for startups to secure capital when VC funding dries up,” he said.
Petrone echoes the sentiment, believing the focus should be less on whether the tech bubble will burst and “more on how the tech sector is readjusting following profound changes” in the market.
“I think investors’ strategies will focus more on profitability and the ability of a company to generate cash flow than they did in the past,” Petrone said.
“From this perspective, gig economy companies will feel the pressure to adapt and change, also given increased regulation.”
Big Tech companies like Apple, Alphabet and Meta remain much more solid in profitability despite challenges with the Ukraine war and Chinese supply chains, according to Petrone.
“Despite these concerns, most of the results from Big Tech were pretty solid in Q1 2022,” she told us.
“These companies will continue to be leaders in social media, ecommerce, and other consumer markets and will also shape the future of work.”
GlobalData is the parent company of Retail Banker International and its sister publications.