Falls of U.S. Tech Stocks Weighten on Policy Changes
On February 3, the stock of Facebook’s parent company Meta fell sharply at the opening of the day. Since then, it remained in the doldrums. At the close of the day, the stock price fell by USD 85.24 to USD 237.76, a plunge of 26.39%, and the market value of nearly USD 240 billion has since evaporated, breaking Apple’s record USD182 billion loss in market value in September 2020. Dragged down by the slump in Meta’s stock price, the three major U.S. stock indexes plunged. The S&P 500 fell 111.94 points, or 2.44%; the Nasdaq Composite fell 538.73 points, or 3.74%; the Dow Jones Industrial Average fell 518.17 points, a decrease of 1.45%.
Meta’s poor financial report was the direct trigger for the collapse of its stock price. On February 2, Meta released its financial report for the fourth quarter of 2021 and the full year of 2021. The performance was significantly lower than market expectations. Its net profit was USD 10.285 billion, a year-on-year decrease of 8%. This is its first profit decline since the second quarter of 2019. Its diluted earnings per share fell 5% year over year to USD 3.67. After the earnings report, JPMorgan downgraded Meta from “overweight” to “neutral” and lowered its target price for the stocks at the end of 2022 from USD 385 per share to USD 284 per share. Analysts at JPMorgan believe that Meta is experiencing a significant slowdown in advertising growth while embarking on an “expensive, uncertain, multi-year transition to the Metaverse”.
The founder of ANBOUND, Chan Kung, believes that the drop in Meta’s stock price, which wipes out more than USD 230 billion in market value and causes the worst drop on Wall Street in nearly a year, deserves serious attention. The biggest question now, according to Chan Kung, is whether the crash is just a problem for Meta, or if it is a problem for the entire tech industry. Is this a one-time stock market fluctuation or a trend correction? If the latter is correct, this is a warning sign that a global crisis is on the way.
Judging from the performance of major U.S. tech stocks, there appears to be a recent general downward trend. From January to February 4, 2022, major U.S. tech stocks have fallen to varying degrees: Facebook’s parent company Meta’s stock price fell from USD 338.5 to USD 237, a drop of 30%; Apple’s stock price was relatively stable, falling slightly from USD 182 to USD 172, down 5.5%; Amazon’s stock price fell from USD 3,408 to USD 3,152, or 7.5%; Netflix fell from USD 597 to USD 410, down 28%; Google’s stock price fell slightly from USD 2,899 to USD 2,865, down 1.1% (yet it notably fell 5.5% from USD 3,031 to USD 2,865 in the past 3 days); in addition, Tesla’s stock price fell from USD 1,200 to USD 923, down 23%. Over the same period, the Nasdaq fell 11% and the Dow about 4.6%. Some tech stocks have fallen more than the broader market index over the same period this year.
What causes the decline in U.S. tech stocks? Different points of view on this issue will influence the assessment of the future state of affairs and the choice of investment strategies.
First, internet technology companies that rely on traffic have encountered growth bottlenecks. The business model of many internet technology companies relies on the traffic economy, with Facebook, Google, and Netflix being the typical examples. Although the COVID-19 pandemic has increased people’s reliance on the internet, the traffic economy is gradually encountering more challenges. Different platforms have intensified their competition for traffic. For instance, Facebook’s average daily active users (DAU) declined for the first time. In the fourth quarter of 2021, the DAU was 1.929 billion, a decrease of 1 million from the previous quarter and an increase of 5% from the fourth quarter of 2020. If traffic bottlenecks become a common problem for internet companies, those that rely on traffic to generate revenue will face significant pressure, and the capital market’s valuation of such companies will change dramatically.
Second, the overvaluation of tech stocks by the capital market has reached its limit. For a long time, global capital markets have assigned high valuations to such stocks, particularly in the United States. This is mainly reflected in several aspects: first, venture capital (VC) mainly focuses on tech companies and perpetuates the myth of these companies. Institutional investors such as various private equity (PE) and mutual funds prefer tech companies, giving them a higher valuation in the secondary market. Capital, on the other hand, has maintained to grant high valuations to these companies for a long time and has reached a point when systematic changes are required.
Third, the new market direction of internet technology companies remains unclear. The bottleneck of the traffic economy has increased the pressure on these companies to find new business areas, which is also an important reason why Facebook changed its name to Meta and turned to Metaverse. However, Meta’s financial data from the Metaverse division’s Reality Labs shows that for the full year of 2021, the lab’s operating income was only USD 2.27 billion, and the loss was as high as USD 10.2 billion. This market performance makes investors feel unoptimistic about the Metaverse business that Meta regards as a future growth point, or as a safe haven. In addition, Meta is also attempting to strengthen the short video business such as Reels, but this is slow, and it faces powerful opponents such as TikTok. As a result, such strategies cannot be of viable support for Meta. Similar pressures have varying but pervasive effects on other internet technology companies.
Fourth, monetary policy tightening such as the Federal Reserve’s rate hike will pull the capital supply in the market. The long-standing capital surplus globally has provided sufficient liquidity support for the growth of the U.S. capital market. Yet, in the face of the current inflationary pressure, the U.S. and Europe have begun to launch tightening policies, and the Fed has released signals of multiple interest rate hikes, which will significantly change the expectations of the capital market. With the systematic adjustment of the central bank’s easing policy, internet technology companies will face the pressure of a general weakening of capital support. This is especially true for the companies that lack the support of the real economy, where they will face the critical impact of capital withdrawal.
Final analysis conclusion:
The development environment for global internet technology enterprises will undergo a substantial transition if these tendencies continue to accelerate and accumulate. This influence may spread to the entire technology industry after being magnified by the capital market. The fields that were chased by capital and overvalued in the past may face revaluation, and investors will also need to reassess their business prospects. The euphoria that has accompanied the loose monetary policy that has been in place since 2008 will be replaced by staged intermittency. Global technology stocks are undergoing a large-scale adjustment period, and some local crises are a real possibility.
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