Ask HN: Is the Tech Bubble Crashing? | Hacker News Reader

Ask HN: Is the Tech Bubble Crashing?

80 pointstempsy52 comments

I’m looking in awe of the total carnage in a lot of tech stocks over the past year or so, and accelerating in the last few weeks/months.

While the FAANGs have so far held up ok (ex-Netflix), there’s a lot of small or mid cap tech stocks that are down 50% or more in just a few weeks. ARKK and related ETFs are down more than 50% since Feb 2021 highs.

I understand a lot of this is due to the Fed’s new hawkish stance which disproportionately impacts high p/e stocks like many public tech companies due to rising rates and asset purchase tapering.

But how long is this trend away from tech going to last?

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It's the nature of future earnings vs current earnings and how inflation changes that.

Let's say you have two companies: 'Established' that makes $100 million/year, and 'Growth' that will make $200 million / year in 10 years, but $0 / year today.

Let's say both of these facts are 100% certain and that all market participants agree. Finally, we assume all market participants work off of a 20 year investment cycle just to keep things simple.

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With 0% inflation, both companies are equal over the 20 year lifecycle.

However, with 5%/year inflation, the established company comes out far ahead.

The $200 million made in year 10 by Growth is only with $122 million (year 1 dollars).

So you can see, future money is less valuable in an inflationary environment. In contrast, the $100 million made by Established is worth $160 million in year 10.

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Once we account for inflation, the growth strategy fails. Alternatively, growth strategy only works in low inflation environments.

In high inflation environments, established sources of money and established real estate / factories is better. The growth company promises to buy a factory in the future, but we all know inflation is making that factory more and more expensive, and it's future promise of future money is getting less valuable.

This example is misplaced because it illustrates the wrong conclusion based on an unrealistic scenario and doesn't factor in interest rates. When future earnings are estimated, it's almost never nominal (except for specific big contracts), but in real value. And with a real value future earning, high inflation / low interest rate actually helps it retain value and boosts those future earnings price. Whereas the real value today gets those $100, but has nowhere safe to earn interest and is instead inflated away. So in time of high inflation, low interest like we had, we saw these growth stocks value fly high. But now there's uncertainty where we might shift into the environment of medium inflation, medium interest, which changes how those growth stocks are valued back to normal.

I guess ultimately you're assuming interest rates or staying with inflation, but they don't and it's actually interest that's the bigger factor.

Let's use a realistic example then.

In 2014, Tesla raised a ton of money from the stock market to build the Model 3 factory / giga factory.

Over the next few years, in a low inflation and low interest rate environment, the investors won. The factory was built, and years later the Model 3 was released to the public.

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How would things have changed if large inflation occurred in 2015 or 2016? The factory would have cost 5% or 15% more than expected, and the money raised in 2014 may have not been sufficient.

The 2014 dollars raised are used to buy a factory in 2015 or 2016. That's just how companies work.

If inflation changes the price of the factory years later, that absolutely affects the investors. The 2014 understanding of factory prices would be wrong, revised later and everyone would make less money in the long run.

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EDIT: With less effective money (due to increased factory prices), the Growth company will either have to raise more money (ie: dilute the shares and split future earnings with more investors), or build a smaller factory (ie: lowering the amount of future production).

Either way, the investors would have lost our on future earnings, roughly coinciding with inflation (ie: how much more the factory cost)

This example is bad because few companies have fixed potential like earning $200M in nominal dollars. More companies will be able to earn $200M (real year-0 dollars).

The real change you see is with interest rates rising, the cost of capital also rises (fewer big investors investing borrowed money or using leverage) and safe alternatives become much more readily available (if a bond or savings account pays money it is safe and you earn a return - as opposed to all the 0% real returns you had in the past).

> This example is bad because few companies have fixed potential like earning $200M in nominal dollars. More companies will be able to earn $200M (real year-0 dollars).

This suggestion only tilts the argument into my favor.

Apple makes 190 million iphones/year or so. In an inflationary environment, Apple will still make 190 million iphones and probably still sell them all.

Those 190 million iPhones will cost 7% more to make, but also sell at 7% higher prices. So we see that Apples expected profits will rise by 7% or whatever inflation is.

But the factory loans that Apple bought 5 or 10 years ago are in 2010 dollars and will remain so. We can see that inflation helps established companies regardless.

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It is the growth companies who don't own factories yet, who are raising money today that get hurt by inflation.

I'm not against your idea, but your arguments are a little wobbly.

> It is the growth companies who don't own factories yet, who are raising money today that get hurt by inflation.

Yep. They, too, compete with opportunities like bonds and savings account.

> But the factory loans that Apple bought 5 or 10 years ago are in 2010 dollars and will remain so.

Lots of companies have issued bonds at very good interest rates. They're not mostly for factories. Apple's been borrowing money at rock-bottom rates to do share buybacks, because the money's basically-free.

> It is the growth companies who don't own factories yet, who are raising money today that get hurt by inflation.

So how many growth stocks are investing big into building massive manufacturing operations, Elon? I can think of around one, but certainly not Apple.

Moderna, Rivian, Peloton, Wework (not factories but buying up real estate), Intel, TSMC, ASML.

Even things like Backblaze buy up hard drives and data centers to sell services to us in the future.

Buying up thing to make more money later is the age old strategy.

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Changing the balance of Growth vs Establishment is the biggest effect of inflation (and interest rates).

Established companies like Intel can rely upon older factories if the new factory turns out to be a bad bet. Growth companies are 100% all in on future factories (or future equipment, like Backblaze).

> The $200 million made in year 10 by Growth is only with $122 million (year 1 dollars).

> So you can see, future money is less valuable in an inflationary environment. In contrast, the $100 million made by Established is worth $160 million in year 10.

I'm a little confused by this. If $200 million was projected as the future earnings of the growth company, isn't it likely that that will also change with inflation? In other words, if we think today that Growth will make $200 million in 10 years, based on inputs X, Y, and Z, then aren't X, Y, and Z also affected by inflation in the future, and so Growth would be affected downstream by this? E.g. maybe part of the $200 million projection is that X will spend 20% of funds on Growth. But now we multiply that 20% by the effects of inflation -- (1.05)^10 -- and X has more to spend, and so Growth makes more as well, proportional to the increase from inflation.

I guess what I'm getting at is that inflation affects everything. In your example, it's as if Growth has some static 10-year-out contract for $200 million, which feels a little odd.

Except that inflation does not affect everything, or more accurately it affects everything differently.

Inflation can be viewed as a change in supply /demand ratios. So car chips supply goes down, demand for cars is constant, price goes up.

Lumber Mills closed during lockdown, supply of lumber constrained, demand goes up, price goes up.

But the price of lumber, and cars, are not really linked.

Yes, some commodities have knock-on effects - food and energy being prime examples - when oil goes up that tends to impact large areas of the economy because large areas have oil in their supply chain.

So, whole average inflation is a useful benchmark number, it may, or may not, impact a companies future earnings, or more precisely, it may not impact earnings and costs in the same way.

Let's continue the example. Established owns a $1 billion factory (equipment and real estate) to make it's $100/year profits.

Growth doesn't own anything yet, they have to build that factory before they get their profits.

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The $1 billion factory will itself be worth $1.07 billion after 7% inflation, and the $1.14 the year after that (after another 7% inflation).

I'm a layman when it comes to all this. But isn't it true that, when investors think about projected earnings, they are often implicitly thinking in terms of projected value? So when we say that "Growth" company will make $200 million/year in 10 years, isn't that statement already calibrated in terms of how valuable we think $200 million is today? I would expect that any business strategist worth their salt would account for inflation in their projections. If anything, it's the variation in inflation that seems like the risk factor. That could also be accounted for, but only to some degree of confidence.

You are right that I've oversimplified things, but you are wrong about the effects of my oversimplification.

What analysis study is the price of factories and associated costs. A growth company (like Rivian) is buying new factories and on the path to make 200,000 trucks / year. There are discussions about whether or not that will happen, but you can see that the price of those trucks (and the factory equipment to make those trucks) is going to vary by inflation.

> I would expect that any business strategist worth their salt would account for inflation in their projections

Yes, they do. But when expected inflation __changes__, those effects are calculated to cause a change in prices today.

The price of the old factories don't change, they were already bought long ago, and are at worst in the form of a bond (ie: based off of old money from 2014 or whenever the bank gave them that money). The price of future factories goes up.

There are at least two possible scenarios:

1) inflation continues to rise, keeping the pressure on the Fed to raise interest rates. This being so, entities like retirement funds that must have some yield, now have non-risky options to get it. They rotate out of tech stocks, which are generally considered higher risk, higher yield.

2) crash in stocks causes the Fed to lose courage, they don't raise interest rates after all. Now Treasury bills and other low-risk options are too low yield, not even keeping up with inflation. Whether they are confident in the tech stocks or not, entities that must find yield somewhere will invest in them because "lower-risk" options are no longer options, as they are guaranteed to lose money on an inflation-adjusted scale. This means tech stocks go back up, even if nobody much believes in them.

Whether or not the Fed (and European Central Bank and other similar entities worldwide) are more afraid of inflation or of stock prices crashing, is not a thing I can tell you. But those are, I think, the two scenarios.

I have wondered if some of the money coming out of the US stock markets might flow into the european markets. Purely because european markets didn't really have the blowoff prices we saw in US markets in the past 6-12 months and in the US there's just not that many places to put it all?

On the other hand usually if the US sells off, so does europe, so probably this time would be no different.

Consider what will better bounce back.

While if US sells off, so does Europe. However as the market recovers you would think Europe would return to previous 'reasonable valuations' faster than US would return to their current greater overvaluation levels?

Personally I've avoided US markets for some time for more p/e realistic markets like Australia (my country) and Europe in part for above reasoning.

The one I am watching is Asia, as SE Asia has the growth potential over western nations I feel but its not quite time but I would like to get more across Asian based ETF's in the future.

...IM no expert so shovel full of salt and all that :)

A trend I've noticed every time this happens is that saying "tech stocks" is kind of like saying "cell phones". At some point they're just "phones" and "stocks".

Not 20 years ago, it was rare to be employed in tech outside of one of the major hubs. Today, some small towns couldn't even exist without Amazon. When I was a kid, if you worked at Wal-Mart, you probably screwed up. Today you can have a high paying SWE job for Walmart. Microsoft is now one of the largest video game developers in the world, and Netflix and Google have essentially killed the entire business of cable TV for anyone under 40. Apple has the most successful and widely adopted consumer electronic device on the market, and without it, people would lose their collective minds.

Everything is now tech.

So, there's a third, middle option: the fed actually walks the tight-rope and the amount of inflation is acceptable and stocks take a couple of years to regain their losses. This is the most likely option. That could mean raising rates as planned, raising fewer times than planned, or not raising at all.

If that works, then great, everyone's stocks will recover over time and they'll be happy, and inflation won't get too out of control. Keep in mind that some inflation is considered "good" in this system and has been going on pretty consistently since we started central banking.

If that doesn't work, then the fed has so much authority to take direct action in the markets, they have essentially infinite capital to deploy to move markets in any direction they'd like. Using this authority is a risk, but they have been successfully doing some type of "quantitative easing" since 2010.

There's a lot more creativity to go in engineering financial markets before they'd simply give up the game and accept loss of control of the currency, because it would invalidate the idea of central banks and be incredibly disruptive to society.

With most of congress filled with wealthy elites, if it comes down to a crisis like in 2008, everyone will cooperate to preserve their elite status, which is exactly what happened then. It's essentially mutually assured destruction between governments and business if they can't work out a deal, which is what they were able to do. They'll do it again if needed.

Also, as long as things change slowly, people generally don't notice, or don't do anything about it because it's become normalized. There's $1.7T in US student loan debt and that's barely crossing the threshold for people being upset enough to take political action about it.

I don't think there's a tech bubble (outside of crypto I mean—that's an entirely different story). Tech (and software specifically) is enormously value creative, and I think it would be very difficult to overvalue that. I think it's normal for market valuations to fluctuate in the short term, but in the long term, I expect tech companies to continue providing enormous value and for markets to continue valuing their stocks accordingly.

People downvoting, is it due to my comment on crypto? Or is there something I'm missing?

If I had to guess, it might be this assertion:

“I think it would be very difficult to overvalue that”

Most people I speak with feel that the market, and tech especially, is overvalued. Put differently, the expectations of returns is so far in the future that they’d rather hold their money back for a nearer term bet.

Ok, thanks for your feedback

I don't know. Average PER should be around 15. Netflix is at PER 36 and there are doubts about the sustainability of their future growth. Amazon is at PER 56, and they do depend on margins which will be impacted by inflation.

PE Ratios are only comparable for like-kinded businesses, and are not indicative of anything on their own. There is no particular value they "should be", and a target of e.g. 15 is only an observed average of past behavior, often blended across many businesses (and therefore not a good indicator of anything).

Consider the company that is regularly booking earnings, while another is spending all their revenue (and more) on investing for growth. The first will result in a lower PE, while the second will have a much higher PE all other things equal. Most growth companies are more similar to the latter, rarely booking earnings, and instead often raising capital or taking on debt to continue growth.

For growth companies, Free Cash Flow analysis and understanding the balance sheet is typically a better way to understand performance and assess value.

I think you're on the wrong perspective. If you look at the 5 year: https://www.google.com/finance/quote/.IXIC:INDEXNASDAQ?sa=X&...

Sure, there's a downturn and it's related to COVID and the US printing money, but overall there's not that much of a downturn. Will it continue? Who knows. Is it tech or is it more of a general downturn in the market? It's definitely not exclusive to tech.

I think a big problem is that a lot of companies either make their money on “engagement” aka monetising user attention via advertising or providing service to companies who do that. The value of the entire system depends on whether advertisers believe their ads are working - if they stop pouring money into it the entire system collapses.

I believe advertising has reached a peak and has been declining for a while and we’re finally seeing the downstream effects of that.

Nearly zero companies believe advertising is not working. That is purely an HN regurgitated opinion which is not reflected in the real world.

I’m not saying it’s not working at all. But there’s only so much advertising you can put in front of people and people have only so much disposable income to spend on the advertised products.

Infinite growth is not possible and I believe we’re way past the peak and are now seeing a readjustment of the market.

There are plenty of companies who believe they do not need to increase their advertising, because they have reached a point of diminishing returns.

The available time market for advertising is probably already reached; attempts to get people to watch more ads in a day have gotten higher levels of pushback (adblock etc.), and thus limited success. This means, in order to achieve growth, advertisers have to either charge more, or increase market share.

Up until now, it's been Google and Facebook taking market share from traditional media, which has more or less imploded, so there's not much more room for growth in that way. They can only charge more for advertising if they are currently charging significantly less than it's worth, which is probably not true. So, even if advertising works at current prices (I am skeptical it always does), that doesn't mean that the revenue from it can keep growing at the rate of growth that Google and Facebook are used to.

For me, "tech bubble crashing" indicators would come from level of investment into new ideas. Right now, SPACs purchase newly incorporated startups. That's going to stop. VC capital is going to get more expensive, which means that the conditions are going to become much stricter before investment. The revenue multiples for future rounds will become much lower.

The FAANG behemoths on the other hand have ad based revenue that isn't going to dip - at least from this aspect of the macroeconomic environment. Other things will crater that, if those things are successful on the public policy side.

FAANG traders likely will take lower price:equity ratios so the shares will trade lower.

Revenue won't dip, but as revenue growth slows, P/E multiples drop and with them, stock prices.

I'm not sure revenue won't dip, you'll probably see companies spend less on marketing\ads and compute resources. It's not gonna be a crazy dip, but enough for a nice short-term correction.

Most likely for some but this was a long needed correction and this is the start of the downfall of many stocks.

For example, Cloudflare ($NET). More than 58% down from its all time high, even before the Fed announcing their interest rate hikes. In the long term, it will possibly reach its all time high again, but needs to correct first before that. Some other stocks many never reach their highs again.

Now it should be easy to agree that this was indeed an obvious sell signal [0] despite many at the time telling you to buy.

[0] https://news.ycombinator.com/item?id=29355360

> But how long is this trend away from tech going to last?

Nobody knows. It’s a non-answer, but the only truthful one.

You can't exactly use tech stocks as a measure of investment as stock market performance is a measurement of trading and not tech investment. The major markets (NASDAQ, SP500, DJIA) are all manipulated/exploited by people who control the majority of the shares/price and are largely disconnected from actual company performance. Hence the "overvalued" tag that is often thrown around. Stock value does boost a company's market cap which does increase their credit limit allowing them to borrow more money to do bigger things though, which is important. But if they don't deliver and can't increase their value based on performance, it's just a ponzi scheme with regard to stock price.

Having said that, the Fed does also boost or squelch the ability of banks to lend to companies/their ability to increase performance not backed by actual profits and expenses (P/E). If you're an investor you look at P/E and the value of products. If you are a trader you look at stock price/performance almost exclusively. Traders trade both directions at all times (hedging long positions). Investors only play long positions. VCs seek to empower companies with potential.

It's the nature of having an economy built on usury. When usury rates were low, people invested in tech that actually changed the world (for the better or worse is a separate discussion). Now that the rates are going back up, people are tempted by parasitic immoral behavior that is lending money with usury.

No one knows for sure. A popular view is:

1) the drop starts because the fed starts to withdraw liquidity...

2) the market will trade sideways while the fed unwinds its balance sheet...

3) Once the market drops sufficiently far (30%+), or a recession is induced, the fed will blink and inject liquidity again ...

4) Causing the next wave of growth.

I think possibly you meant to say:

4) Causing the next wave of asset price inflation

Different companies will fair very differently. Those that have revenue and are (or in a path to being) profitable should be fine. Valuations might take a hit but the companies will be fine.

Those that have crazy valuations but no clear sign of turning enough profit to remotely justify that valuation are going to have a rough few years ahead. There’s a lot that will need to be washed out of the system before things reset and the cycle starts again.

There's a deflation of the asset bubble going on. Anyone compensated in options or RSUs is probably gnashing their teeth a bit but they're still pretty rich. And we may see a moderate cooling in the VC space. But nothing to indicate that business is actually slowing down at all. Quite the opposite. Valuations and P/E ratios have been sky high due to Fed actions but revenues are still pretty great.

I think we're gonna see valuations go back to pre-covid valuations, basically back to "normal".

The "Growth Bubble" will burst, and those companies will shrink back to valuations that are not completely detached from reality (which in some cases will be 0).

FAANGs will still be money printing machines, the same as they've been for the last decade - no big worry there, just a slight correction (10-20%).

I don't understand why this is downvoted. It's a completely fair opinion that is entirely plausible in the near future.

As of today, most stocks are already at pre-COVID levels, if you account for total money supply.

So QQQ was 100 at 2016. Went to 400 in 2021. Should be back to 200 (or less) and still be fairly valued.

But "Crashing" is point of view. I.e. if you short the market (a seller), the market is actually up. I.e. you should not try to time the market but time the DIRECTION of the market.

Also, the Fed is not hawkish, if it could it would not raise rate.

Crashing is also the perspective of new investors who for reasons like not being old enough to invest yet, or being born poor, only entered after the QQQ hit 400.

Gambling should be illegal.

Taking into consideration R&D, Facebook/Meta is at around PER 15. If you don't do that, it's PER 21, which is high but not crazy high. From the rest of the FAANG, maybe Google is not too overpriced. The rest are severely overpriced.

I'd rather own an OIL company at 3x FCF than Netflix or anything like that.

If you have to ask the question if something is crashing, then I believe the answer is no. Faltering? Sure. Crashing? I seriously doubt it. Are we due for a crash? Probably. Am I about to go stake money on it crashing? Nope.

This is the natural reaction to the implementation of various fiscal policies by the US. This sort of flat and reduced market is historically consistent.

When the policies swing back, so will the market.

Time to buy. Buy buy buy!

12:30 PM EST - yes 4:00 PM EST - no

just course correcting

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