The Seville Reporters
The Tech Reset, it's a Good Thing
Updated: May 28, 2022
The NASDAQ closed down for the seventh straight week.
The fall in technology stocks is reminding investors of the dot-com bubble burst.
The fall in tech is a good thing and will allow investors to reconsider how they value tech companies in the future.
The Nasdaq closed down for the seventh straight week, recording its longest losing streak since 2001. For anyone who isn't sure, a reset in tech is underway.
Media brings up the dot-com bubble burst of 1999-2000 a lot, myself included. At times, it can feel like a boomer crying wolf. Whenever an asset class that old investors don’t fancy or understand attracts a lot of new capital, like NFTs in 2020 and 2021, we older investors say, "It's like the dot-com bubble." When an asset class takes a beating after a fast rise in value, like the Bitcoin crash of 2017, older investors also say, "That it's like the dot-com bubble burst." But what we're experiencing now, may be it, a repeat of 1999, 2000.
Two weeks ago, David Sacks, a co-founder of PayPal ($PYPL) and a general partner of Craft Ventures stated that the current tech environment is the worst he’s seen since the dot-com crash. This coming from someone who survived the dot-com bubble burst. The space that tech companies have been given authority to operate in by investors is changing, due to high inflation and rising interest rates. Investors are now paying a lot more attention to every dollar leaving the checking account. In market down cycles, it becomes less about winning and more about surviving. The well of cheap investor money that young tech companies got to draw from over the past decade has dried up. This occurred during the burst of the dot-com bubble as well.
We Deserve This
Retail investors and myself included, have spent the last few years acting more like venture capitalists than cautious investors. Instead of investing in companies with solid balance sheets and positive cash flows, we’ve aligned our money with awful balance sheets, negative profits, negative cash flows, and narcissistic founders, as long as the company was slapped with the “tech” label.
Maybe it's our fear of missing out on the next Amazon, or the next Tesla that has made investors pay high multiples for anything that trades on the Nasdaq and has some user base, no matter how unprofitable the company is. In my own investing, I used to be very strict about investing in companies who weren't profitable, and if they weren't profitable, they had to show consecutive quarters of losing less money. But over the past few years, I've become a story in the Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, and I suspect that other retail investors have too.
Last year, investors bid up Rivian ($RIVN) to an $86 billion valuation based on its backlog of pre-orders for its R1T and R1S vehicles. Rivian's S1 reported the company had over 55,400 pre-orders for its two vehicles. In 2021, Ford ($F) sold 726,004 F150s. SOLD, FOR, MONEY. In its public debut, we declared with our investment dollars that Rivian is just as valuable as Ford. What the hell were we thinking? Rivian is currently down 83% from its 52-week high, and has a valuation of $25.5 billion. Investors have come to their senses.
We've been so blinded by this "tech" tag over the past 10 years, that we'd give a lemonade stand run by a 10 year old a $1 billion valuation if it could prove it had a few customers and a thousand lines of code attached to it.
A reset of the markets is due, and a reset in the way we think and approach technology companies is also due. It's time we realize not everything with code is changing the world or solving complex problems. Some companies are just using code to sell a service or a product, and there is nothing wrong with that. But we can't hand every incorporated team of five with a great code base a huge valuation, if the economics of the marketing, promoting, and putting that code to work for others isn't great. We've been investing billions of dollars in companies that are trying to solve complex world issues, but aren't capable of solving the simple formula needed to create and maintain a solid balance sheet.
Take Advantage of The Reset
It’s hard to hear that pull backs, bear markets, and recessions are good things, but they can be. Bear markets and recessions are painful, but pain serves an important purpose: it lets us know what’s going wrong and what areas need to be tended to.
There has been too much fluff in the markets with a tech label. The market decline of 2000 was great for separating the real from the fluff. The fluff, like Pets.com, MotherNature.com, DrKoop.com, Garden.com, and Mortage.com were gone. Businesses, with good ideas, good services, and good management made it through, like Amazon, Priceline, and Yahoo (If I didn’t live it, I would never believe that Yahoo.com was a top tier internet company). This is what's happening now, the market is reassessing the value that we've given tech companies, and trying to figure out if they are or ever were worthy of the lofty valuations they received in the past.
This is a time to weed through the tech fluff in the markets and find the companies that will be better on the other side of this bear market. If you're an investor that's not into doing a lot of research, then just go with the brand names. Apple ($AAPL) is down 24% from its 52-week high. I don't have a crystal ball, but there's a strong chance that Apple survives this market downturn. Amazon ($AMZN) is down 42% from its 52-week high. I've called Amazon the digital version of Berkshire Hathaway, but instead of a group of insurance companies and brick-and-mortar businesses under an umbrella, Amazon stacks intellectual property (Prime, AWS, Twitch, Fire, Kindle, Alexa) under one umbrella that forms to make something colossal. Adobe ($ADBE), a leader in all things digitally created, is down 42% from its 52-week high. If you're not quite sure how important Adobe is to the current times, let me break it down. If you want to create an NFT, Adobe Illustrator will do that. If you want to create a quality meme for the internet or edit a photo for a top tier magazine, you'll likely be using Photoshop by Adobe. Adobe Premiere is used to edit films that appear in movie theaters to videos that appear on YouTube and TikTok, and if your film or video needs special effects, you can use Adobe's After Effects software. Apple, Amazon, Adobe, and companies similar to these are the tech companies investment dollars should flow to in this down cycle.
This downturn in tech is a good thing, take advantage. Pile in on the strong and proven companies, and prepare yourself to be rewarded on the other side of the bear market.