2000, 2008, 2022: It is hard to avoid the parallels How Big Will the 2022 Share Price Decline Be?

2000, 2008, 2022: It is hard to avoid the parallels How Big Will the 2022 Share Price Decline Be?

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  2000, 2008, 2022:It is hard to avoid the parallels How Big Will the 2022 Share Price Decline Be? JEFFREY FUNK RETIRED PROFESSOR AND INDEPENDENT CONSULTANT
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  2000, 2008, 2022:Many Similarities  From its peak in March 2000, the Nasdaq fell 60% in a single year and hundreds of dotcom startups went bankrupt  The 2008 crash led to bankruptcies for 64,318 firms, including Lehman Brothers and Merrill Lynch, because of rising sub- prime mortgage defaults  The 2022 crash could be worse because it combines the money- losing startups of the dotcom crash with the over-leveraged financial firms of 2008
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  Bubble was createdby hype about “New Economy” Cisco, Qualcomm, Intel, and Nokia became defined as Internet companies before seeing share prices fall by >50% Hundreds of small startups went bankrupt Nasdaq Fell by 60% in One Year
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  2008 Crash Had BiggerDecline Driven by Sub-Prime Mortgages that were Supposed to Increase Home Ownership, and thus Wealth for All
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  Current bubble drivenby broader and more sophisticated narrative than in 2000 & 2008  Current narrative involves technology disrupting almost every sector of the modern economy  Technologies range from AI to augmented reality, blockchain and even science-based technologies such as synthetic biology and nuclear fusion  They are expected by some to remake sectors ranging from healthcare to property (proptech) and even regulated sectors (regtech)  There is even a modern form of the sub-prime mortgage - buy-now-pay later (BNPL). But share prices for these startups have already dropped much further and faster than have other startups.
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  Technology Global MarketSize in 2020 Video Streaming $70 Billion Big Data/Algorithms $46 Billion Tablet Computers $40 Billion OLED Displays $32 Billion Smart Homes $20 Billion (only U.S.) Artificial Intelligence $17 Billion Virtual Reality $16 Billion Augmented Reality $11 B (2019) Commercial Drones $6 B (2018) Blockchain $1.9 B (2020) Today’s Technologies Have Not Achieved Big Markets Sizes Like Those of Past Decades Did 1990: Personal Computers, $132 Billion 2000: Mobile Phones, E-commerce ($446), Internet Hardware and Software ($315B), Enterprise Software ($282B), and Mobile Phone Services ($230B) 2010: Cloud Computing ($127B), Online Ads ($81B), Smart Phones $293B, 2012) Source: Fast Company, Jeff Funk, Lee Vinsel
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  Also Big StartupLosses and Over Leveraged Companies  At end of 3Q 2021, 10 of 133 Unicorn startups had more than $3 billion in cumulative losses, first achieved by Amazon almost 20 years ago including Uber ($24.5B) and WeWork ($12.2B)  Number of publicly traded Unicorns with greater than $1 billion and $500 million in cumulative losses has reached 23 and 59 respectively  Many big companies invested in startups (e.g., Softbank, Pension funds, hedge funds), some of whom are over-leveraged  Above suggests 2022 crash will be bigger than 2000 crash because today’s losses are much bigger than during dotcom period when funding was typically less than $100 million.
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  Many Unicorns HaveCumulative Losses Greater than Annual Revenues  Amazon briefly had cumulative losses equal to revenues when its cumulative losses peaked at $3 billion  There are now 89 ex-Unicorns, among the total of 133, who have cumulative losses greater than 2020 revenues  89 of 133 is about 67%, up from 60% before the IPOs of 2021 are added  This rising percentage partly comes from the many SPACs that had little or no revenues  Rising interest rates will increase the cost of servicing the loans for those losses
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  0 5 10 15 20 25 Profits -0.1> < 0 -0.2> <-0.1 -0.3> <--0.2 -0.4> <-0.3 -0.5> <-0.4 -0.5> <-1.0 <-1.0 Numberof Profitable Startups is Rising Slowly 2019 First Three Quarters 2021 2020 Number of Startups Number of Profitable Startups Slightly Higher in 2021
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  Outside the U.S. Similar losses exist for startups outside the U.S.  At least $100 billion in cumulative losses for startups in China, India, and Singapore  Video-streaming Kuaishou has largest cumulative losses of any ex- Unicorn as of mid-2021 with $34.7 billion, about 50% higher than for Uber.  Many others have cumulative losses higher than their 2020 revenues
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  When Cumulative LossesAre Larger than Annual Revenues  Even if startups magically achieve annual profits equal to 10% of revenue, it would still take 10 years to erase cumulative losses  Although Amazon managed to achieve this, few startups will likely repeat Amazon’s success  particularly when many of the 89 ex-Unicorns cited above have cumulative losses much greater than their annual revenues  Rising interest rates will increase the cost of servicing loans for those losses, and thus make it harder to erase the cumulative losses
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  How Far CouldUnicorn Share Prices Drop?  Share prices are traditionally based on discounted cash flow of a company’s expected income  When a company has had zero profits for many years, probability of achieving profitability is low and thus any company with appreciable cumulative losses, for instance ones exceeding annual revenues, probably has low chance of ever erasing those losses.  With 67% of today’s Unicorn startups in that situation (up from 60% at end of 2021), many of them will go bankrupt or be acquired for fire- sale prices.
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  How Big a“Hole”?  When we add up cumulative income for the 133 publicly traded Unicorns, both ones with losses and profits,  there is a $131 billion “hole” just for American startups, and this hole growing bigger every quarter.  The total market capitalization for just the unprofitable American startups is close to $1 trillion  This means the entire venture capital and startup sector represents a gaping financial hole, one that history tells us will have an impact on that economy
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  Startup Share PricesAre Already Falling, Example of Ark Innovation’s ETF, Down 40% in Last Three Months
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  Few U.S. StartupsNow Among Top 100 Market Capitalization
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  Bigger Concern isPrivately Held Unicorns  There are 1000 globally with total valuation of $3.2 trillion  Because percentage of startups with cumulative losses > annual revenues is higher for those going public in 2021 than in previous years,  privately held Unicorns are probably in worse financial shape than are publicly traded Unicorns  Big companies that invested in these startups through corporate venture capital funds may be forced to write off their investments in both privately and publicly held startups  The $3.2 purported value for privately held Unicorns may be negative to the tune of hundreds of billions of dollars.
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  How will StockMarket Decline Proceed?  Past two crashes occurred over a year or so with many ups and downs  Current decline will also have ups and downs along with likely government interventions  Governments bailed out stock markets in March 2020 with lower interest rates and asset repurchases they may again intervene by not raising interest rates much or by not tapering as much as they have said they will do  There are many variables that will affect the speed and extent of the decline, but the big losses suggest the decline will happen