It seems like an eternity ago, but it was only a year ago. The Nasdaq Composite had just reached its peak in 2021, having more than doubled since the beginning of the pandemic.
Rivian's mega-IPO was the latest in a record-breaking year for new issues. Hiring was brisk, and tech workers reveled in the high value of their stock options.
The landscape has changed dramatically in the last twelve months.
In 2021, none of the 15 most valuable US technology companies generated positive returns. Microsoft's market capitalization has dropped by about $700 billion. Meta's market cap has shrunk by more than 70% since its peak, wiping out over $600 billion in value this year.
Based on the Nasdaq's 12-month drop, investors have lost roughly $7.4 trillion in total.
Interest rate increases have limited access to cheap capital, and rising inflation has rendered all those companies promising future profits far less valuable today. Along with crypto, cloud stocks have plummeted.
There is plenty of suffering to go around. Across the industry, companies are cutting costs, freezing new hires, and laying off workers. Employees who joined those hyped pre-IPO companies and received a large portion of their compensation in the form of stock options are now deeply in debt and can only hope for a future rebound.
Following banner years in 2020 and 2021, when companies pushed through the pandemic and took advantage of an emerging world of remote work and play and an economy flush with government-backed funds, IPOs this year have slowed to a trickle. Private market darlings that raised billions of dollars in public offerings, filling the coffers of investment banks and venture capital firms, saw their valuations slashed.
Rivian has dropped more than 80% from its peak after reaching a market cap of more than $150 billion. The Renaissance IPO ETF, which tracks newly listed U.S. companies, is down 57% year to date.
A small number of tech executives have come forward to admit their errors.
The Covid-19 bump did not, in fact, forever alter the way we work, play, shop, and learn. Hiring and investing as if we'd always be having happy hours on video, working out in our living room, and avoiding planes, malls, and indoor dining was a bad bet, as it turned out.
Add it all up, and the Nasdaq is on the verge of falling behind the S&P 500 for the first time in nearly two decades.
The last time it happened, the tech-heavy Nasdaq was nearing the end of a long period of underperformance that began with the dot-com bubble's demise. Between 2000 and 2006, the Nasdaq only once outperformed the S&P 500.
Is technology facing a similar reality check today? It would be foolish to dismiss Silicon Valley or the numerous attempted replicas that have sprung up around the world in recent years. But are there any reasons to doubt the magnitude of the industry's blunder?
Maybe it depends on how much you believe Mark Zuckerberg.
Meta was supposed to be the year. Prior to changing its name in late 2021, Facebook had consistently delivered excellent returns to investors, outperforming estimates and growing profitably at an unprecedented rate.
The company had already successfully shifted its focus away from the desktop, establishing a dominant presence on mobile platforms and refocusing the user experience away from it. Despite a reopening world and damaging whistleblower allegations about user privacy, the stock gained more than 20% last year.
However, Zuckerberg does not see the future in the same way that his investors do. His pledge to spend billions of dollars per year on the metaverse has perplexed Wall Street, which simply wants the company to regain its footing with online advertising.
The big and immediate issue is Apple, which changed its iOS privacy policy in a way that makes it more difficult for Facebook and others to target users with ads.
With its stock down by two-thirds and the company on the verge of a third consecutive quarter of declining revenue, Meta announced earlier this month that it is laying off 13% of its workforce, or 11,000 employees, in its first large-scale layoff.
“I got this wrong, and I take responsibility for that,” Zuckerberg said.
Massive employee spending is nothing new in Silicon Valley, and Zuckerberg was in good company. Software engineers had long been able to expect large pay packages from major players, led by Google. Tech pay has reached new heights as a result of the war for talent and the free flow of capital.
Amazon recruiters could offer more than $700,000 to a qualified engineer or project manager. According to Levels, a top-level engineer at the gaming company Roblox could earn $1.2 million. fyi. According to H1-B visa data, productivity software firm Asana, which made its stock market debut in 2020, has never turned a profit but has offered engineers starting salaries of up to $198,000 per year.
By the fourth quarter of 2022, those glory days are a distant memory.
According to data compiled by the website Layoffs.fyi, layoffs at Cisco, Meta, Amazon, and Twitter have totaled nearly 29,000 workers. Over 130,000 jobs have been lost in the tech industry. HP announced this week that it will lay off 4,000 to 6,000 employees over the next three years.
It was simply a matter of time for many investors.
“It is a poorly kept secret in Silicon Valley that companies ranging from Google to Meta to Twitter to Uber could achieve similar levels of revenue with far fewer people,” Brad Gerstner, a tech investor at Altimeter Capital, wrote last month.
Gerstner's letter was specifically directed at Zuckerberg, urging him to cut spending, but he was perfectly willing to broaden his criticism.
“I would take it a step further and argue that these incredible companies would run even better and more efficiently without the layers and lethargy that comes with this extreme rate of employee expansion,” Gerstner wrote.
TCI Fund Management, an activist investor, echoed that sentiment in a letter to Google CEO Sundar Pichai, whose company recently recorded its slowest growth rate for any quarter since 2013, with the exception of one period during the pandemic.
“Our conversations with former executives suggest that the business could be operated more effectively with significantly fewer employees,” the letter read. As CNBC reported this week, Google employees are growing worried that layoffs could be coming.
Remember SPACs?
Those special purpose acquisition companies, or blank-check entities, formed to go find tech startups to buy and turn public were a 2020 and 2021 phenomenon. Investment banks were eager to underwrite them, and investors poured in new funds.
SPACs enabled companies that lacked the profile to satisfy traditional IPO investors to gain access to the public market. Last year, 619 SPACs went public in the United States, compared to 496 traditional IPOs.
This year's market has been a shambles.
The CNBC Post SPAC Index, which tracks the performance of SPAC stocks after their initial public offering, is down more than 70% since its inception and by roughly two-thirds in the last year. Many SPACs failed to find a target and returned funds to investors. Chamath Palihapitiya, dubbed the SPAC king in the past, canceled two deals last month after failing to find suitable merger targets, returning $1.6 billion to investors.
Then there's the startup world, which has been known for producing unicorns for over a half-decade.
According to EY's venture capital team, investors poured $325 billion into venture-backed companies last year, with a peak in the fourth quarter of 2021. The easy money has long since vanished.
Companies are now much more defensive in their financings than offensive, raising capital because they need it and often not on favorable terms.
“You just don’t know what it’s going to be like going forward,” EY venture capital leader Jeff Grabow told CNBC. “VCs are rationalizing their portfolio and supporting those that still clear the hurdle.”
Profit is thrown around a lot more these days than in previous years. This is because companies can no longer rely on venture capitalists to subsidize their growth, and public markets are no longer willing to pay a premium for high-growth, high-burn names. The forward revenue multiple for top cloud companies is now slightly more than 10, down from a high of 40, 50, or even higher for some companies in 2021.
Because of the trickle down effect, many companies are unable to go public without a significant reduction in their private valuation. According to David Golden, managing partner at Revolution Ventures in San Francisco, a slowing IPO market influences how early-stage investors behave.
“When the IPO market becomes more constricted, that circumscribes one’s ability to find liquidity through the public market,” said Golden, who previously ran telecom, media and tech banking at JPMorgan.
“Most early-stage investors aren’t counting on an IPO exit. The odds against it are so high, particularly compared against an M&A exit.”
The 2020 and 2021 vintages have underperformed the market as a whole.
In the United States this year, there have been only 173 IPOs, compared to 961 at the same point in 2021. There have been no notable deals in the venture capital world.
“We’re reverting to the mean,” Golden said.
According to FactSet research, an average year may see 100 to 200 U.S. IPOs. According to Jay Ritter, an IPO expert and finance professor at the University of Florida, there were 123 tech IPOs last year, up from 38 on average between 2010 and 2020.
There is no better example of the intersection of venture capital and consumer spending than the buy now, pay later industry.
Companies like Affirm, Afterpay (acquired by Block, formerly Square), and Sweden's Klarna used low interest rates and pandemic-fueled discretionary income to make high-end purchases like Peloton exercise bikes affordable to nearly every consumer.
Affirm went public in January 2021 and reached a high of more than $168 ten months later. As brands and retailers raced to make it easier for consumers to buy online during the early days of the Covid-19 pandemic, Affirm grew rapidly.
Buy now, pay later was everywhere by November of last year, from Amazon to Urban Outfitters' Anthropologie. Customers had trillions of dollars in extra savings. Default rates remained low — Affirm had a net charge-off rate of about 5%.
Affirm has dropped 92% from its peak. Charge-offs peaked at nearly 12% over the summer. Inflation, combined with higher interest rates, dampened previously buoyant consumer sentiment. Klarna's private valuation was reduced by 85% in a July financing round, from $45.6 billion to $6.7 billion.
That's it until we get to Elon Musk.
Even after a nearly 50% drop in Tesla's value, the world's richest person is now the owner of Twitter, following a six-month on-again, off-again drama that was about to end in court.
Musk quickly fired half of Twitter's workforce before welcoming former President Donald Trump back to the platform following an informal poll. Many advertisers have abandoned their campaigns.
And corporate governance is back on the agenda following the sudden collapse of cryptocurrency exchange FTX earlier this month, which managed to grow to a $32 billion valuation despite having no board of directors or finance chief. Top-tier firms such as Sequoia Capital, BlackRock, and Tiger Global saw their investments vanish overnight.
“We are in the business of taking risk,” Sequoia wrote in a letter to limited partners, informing them that the firm was marking its FTX investment of over $210 million down to zero. “Some investments will surprise to the upside, and some will surprise to the downside.”
Despite the crypto meltdown, mounting layoffs, and overall market turmoil a year after the market peak, it's not all doom and gloom.
Golden sees reason for optimism in Washington, D.C., where President Joe Biden's Inflation Reduction Act and the Chips and Science Act will result in investments in key areas of technology in the coming year.
The money from those bills begins to flow in January. Intel, Micron, and Taiwan Semiconductor Manufacturing Company have all announced plans to expand in the United States. Golden also predicts growth in health care, clean water and energy, and broadband in 2023.
“All of us are a little optimistic about that,” Golden said, “despite the macro headwinds.”
(Source:www.cnbc.com)
Rivian's mega-IPO was the latest in a record-breaking year for new issues. Hiring was brisk, and tech workers reveled in the high value of their stock options.
The landscape has changed dramatically in the last twelve months.
In 2021, none of the 15 most valuable US technology companies generated positive returns. Microsoft's market capitalization has dropped by about $700 billion. Meta's market cap has shrunk by more than 70% since its peak, wiping out over $600 billion in value this year.
Based on the Nasdaq's 12-month drop, investors have lost roughly $7.4 trillion in total.
Interest rate increases have limited access to cheap capital, and rising inflation has rendered all those companies promising future profits far less valuable today. Along with crypto, cloud stocks have plummeted.
There is plenty of suffering to go around. Across the industry, companies are cutting costs, freezing new hires, and laying off workers. Employees who joined those hyped pre-IPO companies and received a large portion of their compensation in the form of stock options are now deeply in debt and can only hope for a future rebound.
Following banner years in 2020 and 2021, when companies pushed through the pandemic and took advantage of an emerging world of remote work and play and an economy flush with government-backed funds, IPOs this year have slowed to a trickle. Private market darlings that raised billions of dollars in public offerings, filling the coffers of investment banks and venture capital firms, saw their valuations slashed.
Rivian has dropped more than 80% from its peak after reaching a market cap of more than $150 billion. The Renaissance IPO ETF, which tracks newly listed U.S. companies, is down 57% year to date.
A small number of tech executives have come forward to admit their errors.
The Covid-19 bump did not, in fact, forever alter the way we work, play, shop, and learn. Hiring and investing as if we'd always be having happy hours on video, working out in our living room, and avoiding planes, malls, and indoor dining was a bad bet, as it turned out.
Add it all up, and the Nasdaq is on the verge of falling behind the S&P 500 for the first time in nearly two decades.
The last time it happened, the tech-heavy Nasdaq was nearing the end of a long period of underperformance that began with the dot-com bubble's demise. Between 2000 and 2006, the Nasdaq only once outperformed the S&P 500.
Is technology facing a similar reality check today? It would be foolish to dismiss Silicon Valley or the numerous attempted replicas that have sprung up around the world in recent years. But are there any reasons to doubt the magnitude of the industry's blunder?
Maybe it depends on how much you believe Mark Zuckerberg.
Meta was supposed to be the year. Prior to changing its name in late 2021, Facebook had consistently delivered excellent returns to investors, outperforming estimates and growing profitably at an unprecedented rate.
The company had already successfully shifted its focus away from the desktop, establishing a dominant presence on mobile platforms and refocusing the user experience away from it. Despite a reopening world and damaging whistleblower allegations about user privacy, the stock gained more than 20% last year.
However, Zuckerberg does not see the future in the same way that his investors do. His pledge to spend billions of dollars per year on the metaverse has perplexed Wall Street, which simply wants the company to regain its footing with online advertising.
The big and immediate issue is Apple, which changed its iOS privacy policy in a way that makes it more difficult for Facebook and others to target users with ads.
With its stock down by two-thirds and the company on the verge of a third consecutive quarter of declining revenue, Meta announced earlier this month that it is laying off 13% of its workforce, or 11,000 employees, in its first large-scale layoff.
“I got this wrong, and I take responsibility for that,” Zuckerberg said.
Massive employee spending is nothing new in Silicon Valley, and Zuckerberg was in good company. Software engineers had long been able to expect large pay packages from major players, led by Google. Tech pay has reached new heights as a result of the war for talent and the free flow of capital.
Amazon recruiters could offer more than $700,000 to a qualified engineer or project manager. According to Levels, a top-level engineer at the gaming company Roblox could earn $1.2 million. fyi. According to H1-B visa data, productivity software firm Asana, which made its stock market debut in 2020, has never turned a profit but has offered engineers starting salaries of up to $198,000 per year.
By the fourth quarter of 2022, those glory days are a distant memory.
According to data compiled by the website Layoffs.fyi, layoffs at Cisco, Meta, Amazon, and Twitter have totaled nearly 29,000 workers. Over 130,000 jobs have been lost in the tech industry. HP announced this week that it will lay off 4,000 to 6,000 employees over the next three years.
It was simply a matter of time for many investors.
“It is a poorly kept secret in Silicon Valley that companies ranging from Google to Meta to Twitter to Uber could achieve similar levels of revenue with far fewer people,” Brad Gerstner, a tech investor at Altimeter Capital, wrote last month.
Gerstner's letter was specifically directed at Zuckerberg, urging him to cut spending, but he was perfectly willing to broaden his criticism.
“I would take it a step further and argue that these incredible companies would run even better and more efficiently without the layers and lethargy that comes with this extreme rate of employee expansion,” Gerstner wrote.
TCI Fund Management, an activist investor, echoed that sentiment in a letter to Google CEO Sundar Pichai, whose company recently recorded its slowest growth rate for any quarter since 2013, with the exception of one period during the pandemic.
“Our conversations with former executives suggest that the business could be operated more effectively with significantly fewer employees,” the letter read. As CNBC reported this week, Google employees are growing worried that layoffs could be coming.
Remember SPACs?
Those special purpose acquisition companies, or blank-check entities, formed to go find tech startups to buy and turn public were a 2020 and 2021 phenomenon. Investment banks were eager to underwrite them, and investors poured in new funds.
SPACs enabled companies that lacked the profile to satisfy traditional IPO investors to gain access to the public market. Last year, 619 SPACs went public in the United States, compared to 496 traditional IPOs.
This year's market has been a shambles.
The CNBC Post SPAC Index, which tracks the performance of SPAC stocks after their initial public offering, is down more than 70% since its inception and by roughly two-thirds in the last year. Many SPACs failed to find a target and returned funds to investors. Chamath Palihapitiya, dubbed the SPAC king in the past, canceled two deals last month after failing to find suitable merger targets, returning $1.6 billion to investors.
Then there's the startup world, which has been known for producing unicorns for over a half-decade.
According to EY's venture capital team, investors poured $325 billion into venture-backed companies last year, with a peak in the fourth quarter of 2021. The easy money has long since vanished.
Companies are now much more defensive in their financings than offensive, raising capital because they need it and often not on favorable terms.
“You just don’t know what it’s going to be like going forward,” EY venture capital leader Jeff Grabow told CNBC. “VCs are rationalizing their portfolio and supporting those that still clear the hurdle.”
Profit is thrown around a lot more these days than in previous years. This is because companies can no longer rely on venture capitalists to subsidize their growth, and public markets are no longer willing to pay a premium for high-growth, high-burn names. The forward revenue multiple for top cloud companies is now slightly more than 10, down from a high of 40, 50, or even higher for some companies in 2021.
Because of the trickle down effect, many companies are unable to go public without a significant reduction in their private valuation. According to David Golden, managing partner at Revolution Ventures in San Francisco, a slowing IPO market influences how early-stage investors behave.
“When the IPO market becomes more constricted, that circumscribes one’s ability to find liquidity through the public market,” said Golden, who previously ran telecom, media and tech banking at JPMorgan.
“Most early-stage investors aren’t counting on an IPO exit. The odds against it are so high, particularly compared against an M&A exit.”
The 2020 and 2021 vintages have underperformed the market as a whole.
In the United States this year, there have been only 173 IPOs, compared to 961 at the same point in 2021. There have been no notable deals in the venture capital world.
“We’re reverting to the mean,” Golden said.
According to FactSet research, an average year may see 100 to 200 U.S. IPOs. According to Jay Ritter, an IPO expert and finance professor at the University of Florida, there were 123 tech IPOs last year, up from 38 on average between 2010 and 2020.
There is no better example of the intersection of venture capital and consumer spending than the buy now, pay later industry.
Companies like Affirm, Afterpay (acquired by Block, formerly Square), and Sweden's Klarna used low interest rates and pandemic-fueled discretionary income to make high-end purchases like Peloton exercise bikes affordable to nearly every consumer.
Affirm went public in January 2021 and reached a high of more than $168 ten months later. As brands and retailers raced to make it easier for consumers to buy online during the early days of the Covid-19 pandemic, Affirm grew rapidly.
Buy now, pay later was everywhere by November of last year, from Amazon to Urban Outfitters' Anthropologie. Customers had trillions of dollars in extra savings. Default rates remained low — Affirm had a net charge-off rate of about 5%.
Affirm has dropped 92% from its peak. Charge-offs peaked at nearly 12% over the summer. Inflation, combined with higher interest rates, dampened previously buoyant consumer sentiment. Klarna's private valuation was reduced by 85% in a July financing round, from $45.6 billion to $6.7 billion.
That's it until we get to Elon Musk.
Even after a nearly 50% drop in Tesla's value, the world's richest person is now the owner of Twitter, following a six-month on-again, off-again drama that was about to end in court.
Musk quickly fired half of Twitter's workforce before welcoming former President Donald Trump back to the platform following an informal poll. Many advertisers have abandoned their campaigns.
And corporate governance is back on the agenda following the sudden collapse of cryptocurrency exchange FTX earlier this month, which managed to grow to a $32 billion valuation despite having no board of directors or finance chief. Top-tier firms such as Sequoia Capital, BlackRock, and Tiger Global saw their investments vanish overnight.
“We are in the business of taking risk,” Sequoia wrote in a letter to limited partners, informing them that the firm was marking its FTX investment of over $210 million down to zero. “Some investments will surprise to the upside, and some will surprise to the downside.”
Despite the crypto meltdown, mounting layoffs, and overall market turmoil a year after the market peak, it's not all doom and gloom.
Golden sees reason for optimism in Washington, D.C., where President Joe Biden's Inflation Reduction Act and the Chips and Science Act will result in investments in key areas of technology in the coming year.
The money from those bills begins to flow in January. Intel, Micron, and Taiwan Semiconductor Manufacturing Company have all announced plans to expand in the United States. Golden also predicts growth in health care, clean water and energy, and broadband in 2023.
“All of us are a little optimistic about that,” Golden said, “despite the macro headwinds.”
(Source:www.cnbc.com)
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