WHAT’S HURTING TECH FIRMS?
Stock markets have in general been pummelled since the start of 2022 by concerns over surging inflation and rising interest rates, while Russia’s invasion of Ukraine added geopolitical unrest into the stew of volatility.
But the tech sector, especially disruptors such as e-commerce or ride-hailing firms, seems to have taken on a larger hit as investors desert so-called growth stocks for safer pockets in the market like energy and utilities.
For instance, the tech-heavy Nasdaq has lost almost 18 per cent year to date, versus the 11 per cent decline in the S&P 500 and 9 per cent in the New York Stock Exchange Composite.
“Shares of all kinds of companies have taken a beating this year but tech companies have lost significantly more than other sectors,” said Associate Professor of Finance Vijay Yadav from the ESSEC Business School Asia-Pacific.
“Rising interest rates have disproportionately higher negative effect on the valuation of new tech companies because their cashflows are generally far into the future and therefore get discounted more heavily at higher interest rates.
“The risks of recession and geopolitical uncertainty also hurt share prices of new tech companies more because their valuations are often driven by investor sentiment that seems to have turned negative in the changing environment,” he added.
The precipitous drop in some of these highest-growth tech stocks also signalled growing wariness among investors about companies that are not yet able to turn a profit.
“The extent of the decline is a reflection of the risk inherent in their business,” said Maybank Securities analyst Samuel Tan, noting that many Internet stocks remain loss-making companies “with much of their value locked up in a “terminal value” in the future when they are profitable … and can be valued through free cash flow models”.
Echoing that, Associate Professor Nitin Pangarkar from the National University of Singapore (NUS) Business School said: “A lot of the high valuations were based on assumptions that may or may not pan out and now that there are obstacles in the way, optimism has turned into pessimism.
“Markets have become very sceptical of money-losing companies.”
“REMAIN CAUTIOUS”
Even with the recent rebound, experts said the outlook for these tech stocks remains uncertain.
Referring to the likes of Grab, Sea and Shopify, Assoc Prof Yadav said: “It remains to be seen whether the recent rebound in their share prices was only a bear market rally or represents a real change in fortunes for these companies.”
While the large declines may represent a buying opportunity, investors “should remain cautious in the current uncertain economic environment”, he added.
An analysis back in May from investment news site The Motley Fool carried the same piece of advice.
Using the example of Shopify, it noted that while the stock may be looking like “a clear-cut bargain” after the selloff, there is the risk of “rapidly decelerating growth” given how e-commerce players will have to cope with challenges such as rising shipping and logistics costs.
“Even if Shopify does well, growing faster than the e-commerce market as a whole and maintaining its status as the go-to for online selling tools, outperformance is far from guaranteed. Be careful out there,” it said.
Assoc Prof Pangarkar said the steep share price declines underscore the importance for tech firms to showcase their ability to rein in spending and display fiscal discipline after having depended on subsidies and aggressive marketing to fuel years of growth at breakneck speeds.
“They can no longer go overboard with spending just to grab market share. You need to have a path to profitability,” he said.