We are in a capitulation year for US equities. In 2022, the S&P 500 index fell 20%the poorest performance since 2008. But the biggest blow comes from tech companies, with the Nasdaq cutting 31% in the year“. Nery Persichini, of GMA Capital, describes the phenomenal climate change on Wall Street, which has especially punished the so-called FAANG, the icons of Silicon Valley, “who have melted 37%”, says the financial specialist.
FAANG is the acronym of Facebook, Apple, Amazon, Netflix and Google, the reference points of a sector that “from a star in the pandemic has become a star”, according to the definition of Gustavo Neffa, of Research for Traders. And this despite many companies in 2021, among these the Argentine unicorns Mercado Libre and Globantreached record ratings on the New York Stock Exchange.
The underlying change is that the times of money abundance due to the high monetary issue ended with the pandemic. and central bank rate hikes. The Fed (the US Federal Reserve) has kept it at 0.25% for almost two years and in 2022 it was raised to 4%, with the aim of combating annual inflation which today is around 8.2 %.
“In terms of size and time, this is the biggest money squeeze since the early 1980s”, Explains Pedro Siaba Serrate, Head of Research at PPI. For the United States and Europe, the priority is to lower prices even at the cost of a recession. Equity markets acknowledge this, but volatility has a greater impact on sectors that have best capitalized on the abundance of liquidity of the two-year period ending in 2021, such as high technology.
For the same reason, albeit with nuances, Amazon shares hit a record high of US $ 185.93 in July last year and are now worth US $ 89.3, which is a 52% drop. Similar drops from their peak values were recorded by newspapers from Google (44.3%), Netflix (49.6%), Uber (54.6%), Tesla (47.8%) and Microsoft (37.6%). %). Of all, the one that lost the most was Facebook – today Meta Platforms – (76.7%) and Apple was the one that resisted best (23.8%).
The social network created by Mark Zuckerberg is going through a critical moment. Beyond the new financial environment, its commitment to the metaverse (hence its new name) is highly questioned by investors. “The development of the new platform is eating you a box that is now $ 170 million when it previously averaged $ 9,000 million”, Says Damián Vlassich, an analyst at IOL (Invest Online).
While all the tech companies have been hit, Apple’s situation is less critical. It has a market value of nearly $ 2.2 trillion, equivalent to that of Google, Amazon, Facebook and Netflix combined. With today’s numbers, many analysts believe that during the pandemic a new stock market bubble has been createdbut rules out a crisis similar to the 2001 dotcom crisis.
“Valuations were high and the downtrend affects them, but they are another type of company. They have a large cash position, low debt and they do not run the risk of breaking and disappearing, as was the case with Internet portals at the turn of the century, ”says Diego Martinez Burzaco, Head of Research at Inviu. The same believes the operator and stock market analyst Rubén Pasquali and recalls that some giants, such as Amazon and Mercado Libre, were among the few dotcoms that managed to survive that crisis, “even if it took many years to recover” .
Pasquali points out, however, that during the pandemic there were widespread purchases of shares “because there were things to buy and everything was going well, with so many new people entering the market and where technology represents the new”. However, he finds Similarities to the dotcom bubble crisis in cryptocurrencieswith bitcoin trading at $ 20,000, well below the nearly $ 70,000 reached in November 2021. “The public is renewed,” says Pasquali ironically.
The Fed has anticipated that its priority is to lower inflation in the US and that it will continue to raise rates for as long as necessary. “The risk of a recession in the US adds new doses of uncertainty about the ability of companies to improve revenues and, therefore, would exert downward pressure on prices,” interprets Persichini.
However, not everyone has pessimistic forecasts. “Forward, we observe a recession caused by the rate hike, but it’s a mild recession”, Explains Augusto Darget, financial analyst and stock market consultant.
This specialist believes it is very likely that the United States will finally be able to lower inflation, that the economy will recover, along with the markets. “The employment numbers are better and this is an indicator that next year is very strong,” he says. Pasquali concludes: “The Federal Reserve has said it will raise rates, but at a slower pace. I agree that there will be some recovery ”.
Stock markets and corporate reality don’t always go hand in hand. A curious case is that of Mercado Libre. In January 2021, the share of the creature created by Marcos Galperin was close to $ 2,000, which allowed it to surpass a market valuation of $ 100,000 million. Vlassich recalls that “in this context, Mercado Libre showed no profit”, due to its aggressive reinvestment policy. Currently, with a valuation of nearly $ 47 billion, it “makes money”To add.
The same thing happens with Globant, says Vlassich, and in the last 4 quarters it has made profits ”. The unicorn led by Martín Migoya “has in his favor the fact that most of his income comes from the services he offers in the United States”.
The startup universe, says Martínez Burzaco, is at greater risk. “When there was abundant liquidity, ridiculous evaluations were approved. Now that private financing has ended, investors are asking them to show the profitability of their projects and be cautious with costs. This can cause some failures, “he says. Some, like BuenBit, have fired a good portion of their staff.
Adjustment times
The excess liquidity spilled into the equity markets. The large technology companies listed on Wall Street have benefited, but also many startups and very young companies, which have attracted the interest of private investment funds. According to a survey by consulting firm CB Insights, in the first half of 2021, 249 new unicorns emerged worldwide. And in the past year, $ 15 billion has been invested in technology initiatives in the region, a record volume.
That’s the way it goes, last year 8 Argentine startups managed to enter the exclusive unicorn club, as the companies that reach a valuation of 1 billion US dollars are known. Until then, only 4 had managed to do so: Mercado Libre, Globant, Despegar and OLX. Since March of last year, Auth0, Aleph, Vercel, Mural, Bitfarms, Ualá, Tiendanube and Technisys have joined together.
Today many of these quotes are in doubt. Financial specialists warn that “the era of infinite money and gifts is over and that a rate hike cycle is coming.” However, they make it clear with some irony unicorns will not disappear like dinosaursbut that many startups have the challenge of proving that they can be profitable in the short term in front of their investors.
“A startup is always in crisis but investors are now demanding to prove their financial health”, Says Ignacio Plaza, of the Draper Cygnus fund. In simpler words, “this means they shouldn’t expect to receive money for two or three years” and in this context of cost adjustment, “layoff is one of the simpler variables.”
In the first half of the year, according to ARCAP (the body that brings together private funds), the number of investment rounds was reduced. This lack of funding has led to staff layoffs, especially in areas that had grown a lot in the years of the pandemic, such as fintech and the world of cryptocurrencies.
“Since there was a lot of liquidity, ridiculous evaluations of ridiculous companies were approved”, Says Diego Martínez Burzaco, of Inviu. The expert adds that in this context, with the change in trend, the priorities of startups are different. Previously, the main goal was to grow and expand into other markets. “Today we have to cut costs to survive“, He says.
“They are cycles,” Plaza plays down. “The game now is not about who grows the most, but who survives“, Said last June Federico Ogue, CEO and founder of Buenbit, who fired almost half of his employees (from 215 to 115) harassed by the lack of funding and above all by the collapse in the price of bitcoin, after hitting the record of $ 70,000. Today it is trading around $ 20,000.
“After a 2021 of exponential growth for the tech industry, we are going through a phase of global adjustment and review, in which the largest company to the smallest are forced to redefine their strategy,” justified the company via Twitter. Specifically, the new owner of the social network has announced that it will lay off 3,700 employees.
Source: Clarin
