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The reasons why the collapse of technology stocks may be far from over

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For anyone making a living in the stock market, the recent car crash at tech stocks is mesmerizing. There are many reasons to believe that this is not over.

This is not a big problem for Big Tech, although the wealth wiped out since the beginning of the year is significant. Between them, the five largest technology companies lost nearly $ 2.6 trillion. This is a decrease of 26 percent, which is twice the decline of the Dow Jones industrial average.

Serious questions remain. Amazon suffers from uncharacteristically serious adjustments after massive spending, while the problems Meta faces when the former Facebook tries to reposition itself as a meta-world company are little available to the existential. But overall the Big Tech award over the rest of the market has been largely erased, and the defensive qualities of the companies are likely to manifest in more difficult economic times.

The ax hangs, rather, over high-tech companies. It is here that estimates have become the most stretched, and where the market is experiencing the greatest difficulty in finding its lowest edge. As investors look for more appropriate financial criteria by which to judge these companies, as well as the correct valuation ratios applied to these indicators, volatility is likely to remain high.

Numerous earnings were favorites that growth investors used to pursue stocks higher, at least until the turnaround that was set last November. With regard to this indicator, there is ample scope for further decline, especially as markets often scale beyond on the way down as well as on the way up.

Zoom is now trading less than six times the expected sales this year, far from a multiple of more than 85 revenue, which it peaked in 2020. But Tomasz Tunguz of Redpoint Ventures estimated this week that even after a nearly 70 percent drop, cloud software companies are still trading at a 50 percent premium over the multiple price-earnings they were in 2017 year.

Cartoon profits are also quickly falling out of favor as investors try to assess the resilience of companies that were set up for growth but face financial shock and a possible economic downturn. Both investors and technology executives are beginning to turn away from the two favorite profit measures that were applied among technology investors during the market boom – earnings before interest, taxes, depreciation and amortization; and net income, which excludes the cost of stock compensation.

Dara Khasrovshahi, CEO of Uber, told the staff this week in a travel company that in a tougher financial climate it’s time to abandon ebitda targets and become a positive cash flow. After spending nearly $ 18 billion since 2016, he was lucky that Uber was already on the verge of reaching that milestone – although a new focus on spending would be needed to make a steady profit as a result. Many other technology companies, accustomed to the ready supply of cash in good times, are still far from reaching the limit of free cash flow.

Distributing limited shares to staff, meanwhile, has become for many companies a way to find talent in the hot tech job market without cash to the detriment of the revenue figures to which Wall Street has paid the most attention. Workers began to look at stock compensation as a guaranteed supplement to their regular income, rather than an option lottery as was the case before. Like Dan Loeb from Third Point wrote to its investors this week, which will force companies to either raise wages to keep employees happy or issue much more shares, which will dilute existing shareholders but will not be obvious to those who still look at earnings without GAAP .

Meanwhile, there are many other companies that have no profits by any measure and do very little in sales, making the market increasingly difficult to find the bottom.

Manufacturer of electric trucks Rivian reached stock market value was $ 91 billion at the time of his IPO last year, despite the fact that he sold only a few cars. After falling 80 percent, Rivian may have found some sex: on Wednesday, it traded almost at its book value, thanks to $ 15 billion in net cash on its balance sheet. This proved to be a good basis for a 14 percent rebound on Thursday after the company reported earnings.

Many companies in this situation do not have a balance sheet that could be returned to. This is especially true Spacs, or special-purpose funding mechanisms used to publish companies at an early stage. As risk escapes continue, even today’s tense assessments may seem overly optimistic.

richard.waters@ft.com

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