Tech giants glitch as crypto crashes
Expect some economic indigestion as the tech bubble "bursts"
Expect some economic indigestion as the tech bubble "bursts"
Atlassian - the tech giant founded by Australian Rich Lister Mike Cannon-Brooks - has lost half its value so far this year.
The software company founded by Cannon-Brooks and his more low-key business partner Scott Farquar, has plunged 47% in value since the start of the year.
It turns out that rising inflation (and interest rates) is causing havoc in the US and here - and it's also spelling big trouble for cryptocurrency.
Atlassian suffered a share price drop of 9% alone yesterday - similar falls late last month were triggered by the bad news the company reported to shareholders that it made a US$31m loss in the three months to March 31 (that was compared with a $US160m profit over the exact same period last year).
But it’s all coinciding with a huge wave of selling off tech stocks on Nasdaq, the New York based stock exchange where lots of big software companies, including Atlassian, are listed.
Remember we reported on Netflix recently? It was a similar story. Bad company results (in their case, losses from subscribers cancelling) caught up in the bumpy ride for US-listed stocks.
The tech trouble is being propelled by big forces like inflation and cost of living woes (which are even more of a big deal overseas than they are here), and rising interest rates.
Even so, Atlassian is leading the downward trend, with losses that far outstrip Nasdaq’s 26% decline.
Cannon Brookes, who you may remember as that green energy dude who has acquired a slice of Australia’s largest emitter, AGL, and his business partner, Farquhar, will have suffered an enormous personal financial loss.
They both featured on The Australian’s Rich 250 list this year running in 4th and 5th place with valuations near $21bn each – those estimates would now be closer to $11.5bn each.
Overall, Nasdaq has now lost all of the gains made since March 2021 as the index dropped below its key 4000 level earlier this week.
Associate Professor of Finance at RMIT Angel Zhong says the reason we were seeing drops in the share market was because of "the burst of the tech bubble".
"Last year, there were a lot of comments about whether there is a tech bubble, and talks about market correction. No matter whether in Australia or the US, the market has been supported by a booming tech industry.
She also pointed to companies like Afterpay and Zip, which made it into the ASX top 50 and sold to Jack Dorsey's Block for $39 billion, adding that so-called buy now pay later companies "with such expensive valuations, mostly don't have any profits."
"Over the last few years, there has been a tech bubble, supported by living in a time of ultra low interest rates," Zhong says.
The cypto bros have also been caught up in the ripples from our new rising inflation world.
You'd hope that cryptocurrency wouldn't follow to closely the ups and downs of the share market - the whole point is that it's a different asset altogether - but here we are.
Bitcoin has plunged more than 50% from its all-time high set in November, falling below $US30,000 ($A43,400) for the first time in nearly a year, with a widespread crypto bloodbath causing investors to panic and ask renewed questions about the digital currency’s long-term value.
Bitcoin slumped on Tuesday as low as $US29,944 – its lowest figure since July 2021 – while rival crypto asset ethereum fell even more severely, losing 17% of its value since last Thursday and dropping in price by about a third this year alone.
Zhong says: "For two years, prices (of crypto and tech stocks) have risen to a level above the fundamental or intrinsic value. At a certain point, prices would decline to a level that reflects the true value of the stocks. It's bad for those who bought at the peak."
Finance guru Robert Gottliebsen, writing in The Australian, has spelled out the carnage for newish investors who borrowed heavily to add more digital dough to their crypto wallets: "In recent days, massive numbers have been sold out by their lenders with the loss of all their capital. Leveraged investors in technology stocks have suffered the same fate".
"Sadly, the dangers of over leveraging equity investments needs to be learned by each generation and the current youngsters have suffered more than their parents and grandparents, because they saw cryptocurrencies and high technology stocks as part of a new era in assets."
Here are some more pointers from the godfather of investment:
- There will be rallies that recover some of the losses to tech stocks (but things could get much worse before they get better).
- Want to know where to invest in a high interest rate world? Look to those companies that can raise their prices easily enough to keep pace with inflation.
- The property market is probably next so brace yourself for a fall in the value of your home.
- On the bright side, the trouble in the markets could make further big rate rises less likely as people calm down their spending.
Gottliebsen says it's basically a case of history repeating itself and young investors are likely to get some "I told you so" finger wagging from their parents and grandparents, who would have seen the epic highs and lows of the mining and dotcom booms in their day.
Zhong says: "I held a focus group with young investors. The reason why investors rush into the share market and bitcoin market was due to low interest rates and booming property prices. Young investors felt they couldn't afford a house, and still wanted to handle finances to empower themselves financially, which is why they invest so heavily in shares and crypto which drives up the sharemarket and crypto market."
Her advice to investors is: "With a price drop and large declines in share prices, it's reasonable to expect that emotions will be affected, but treat investments with a long term perspective.
"Stick to your strategy, actively monitor holdings, but you don't need to actively trade. And don't just blindly follow the news. Avoid buying stocks or crypto that have risen too much, and avoid panic selling when the market is bad ... For young investors especially, when they are on a lot of forums, they are susceptible to impact from others."
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