Wednesday, June 29, 2022

Is this another tech bubble bursting?

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Shreya Christina
Shreya has been with for 3 years, writing copy for client websites, blog posts, EDMs and other mediums to engage readers and encourage action. By collaborating with clients, our SEO manager and the wider team, Shreya seeks to understand an audience before creating memorable, persuasive copy.

That screaming sound you hear? That’s the stock market collapse led by a tech stock collapse: The overall market is down 18 percent this year and technology stocks are down about 30 percent.

That sound is also a “I told you so” refrain from people who for years have compared bull market investors to the dotcom bubble of the late 1990s — saying things will get worse. In the dotcom crisis that began in March 2000, technology stocks eventually fell nearly 80 percent. That’s the kind of collapse that can hit anyone, even if they don’t work in technology and don’t bet on stocks (or rather, they to think they bet on stocks).

And there are certainly many parallels: Like the dotcom era, the stock boom, which started in 2009 and was huge during the pandemic, was fueled in large part by very low to nonexistent interest rates, making investors more interested in companies that promised exorbitant returns. to deliver. And just like in the dotcom era, we’ve seen many companies promise products and results they can’t deliver, such as hydrogen-powered trucks

But there are significant differences between 2022 and 2000. The most important: Unlike the dotcom era, many of today’s most valuable publicly traded technology companies are real companies — they make and sell things that people appreciate, and usually make a profit from it. So while companies like Facebook, Google and Amazon have all seen their stocks plummet this year, that doesn’t mean their companies are disappearing — just that investors no longer think their growth prospects are as attractive as they once were.

It’s also worth pointing out that while the tech industry employs many people – an estimated 5.8 million in 2021, according to the Computing Technology Industry Association — that represents only about 4 percent of total US employment.

A joker in this compare-and-contrast is the deflation of the crypto bubble, which is separate but strongly related to the overall technology and stock bubble. On the one hand, the price of bitcoin and other crypto-related currencies and products seems to be evaporating very quickly: last fall, a single bitcoin was worth $67,000; now it is worth about $28,000. On the other hand, if you bought a bitcoin in 2014, when it cost about $700, you’re still good off today.

The key questions for crypto watchers: is this a complete collapse or one of the many ups and downs the tech world has seen over the past decade? The question for everyone else: if crypto collapses, will it only affect people who have bought or used dogecoin, Bored Ape NFTs, or any other kind of crypto – a group that supposedly represents 16 percent of Americans – or can it be a “infectionthat could devastate the global economy? If we knew, we’d tell you.

In the meantime, here are three charts that outline some of the reasons why it now looks a lot like 2000 — and some reasons it doesn’t.

While you may have heard a lot about stocks and stock trading in recent years — largely because of the explosion in trading fueled by mobile apps like Robinhood — Americans aren’t significantly more exposed to the stock market than they have been in the past: About 58 percent of the country owns some type of stock, be it individual stock or bundles of them through 401(k)s and other retirement accounts. That’s not significantly different from the bubble era, but it’s not a peak either.

In the dotcom era, if you wanted to invest in a tech stock, you had to find a tech stock — and a lot of people did. But now you’re probably invested in technology, even if you don’t want to. That’s because many of the largest tech companies — such as Google, Facebook, and Apple, with a combined market cap of more than $4 trillion — now make up a significant proportion of the major stock indices. Which means relatively conservative investment vehicles, such as index funds from Vanguard and Fidelity, own large swaths of tech companies. So even if your only exposure to the stock market is through your 401(k) or IRA, you are likely exposed to technical stocks.

One way to measure a stock’s relative risk is to measure its price-to-earnings (P/E) ratio – how much does a company’s stock cost compared to its profit? In the dotcom era, when it was entirely possible to start a publicly traded company with little revenue and no profit at all, P/E ratios were off the charts. Today, big tech companies routinely throw away billions in profits, making for much more conservative ratios and stock prices that should be more sustainable. A major outlier: Tesla stock, which has made Elon Musk the richest man in the world, with the ability to fund a $44 billion bid on Twitter, continues to trade at a nosebleed P/E ratio of 100. When they come back to Earth, Musk will still be rich, but not nearly as much.

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