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Helitha Rupasinghe
Helitha Rupasinghe

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What Are The Signs That The Tech Bubble Is About To Burst?

The world’s largest technology companies that thrived when the pandemic began over two years ago have now suffered losses over $1 trillion in value as investors fear that companies boosted by the pandemic are running out of steam.

In this post, we'll take a glance at what the the long run might hold for tech stocks in 2022.

A Compelling Story

We had the dotcom bubble within the 1990s which had the subsequent stories: 'The Internet Changes Everything.' The housing bubble of the 2000s had one: 'Real Estate Never Declines In Price'.

The story of stock promises has become important in recent years where they promise to transform the planet but tend to require a lot longer than the promoters would have you belive.

The satisfaction of the web eventually arrived, but not before destroying many dotcom companies with poor business models. Even now the survivors of previous bubbles get fixed with stocks that promise radical transformation and charge a very high price of concession.

Paying Attention To Value

The story is what offers a subject to build investors hopes and dreams on.

In a bubble, stock prices climb regardless of news. And if it misses earnings estimates by a mile? It still climbs. The story of stocks seem unbreakable, and that they are for a time.

The Stock climb amid the pandemic has now casted doubt on Big Tech's ability to take care of the momentum needed to justify high valuations spurred by the pandemic’s unprecedented demand for new technology.

Overvalued Tech Assets

During these times you'll see promoters hype up 'collectibles' like NFTs which never seem to decline in value. Assets such as these produce no cash flow and so turning a profit hinges entirely on finding someone else to pay more for them than you did.

And the definition of “investible” assets continues to grow: from monetary gold, debt securities, loans, insurance, pension schemes, digital art NFTs and therefore the list goes on and on.

As investors weigh these risks, cryptocurrencies have seen a flood of interest in 2022 as promoters rush in to the space to cash out. The most recent global market valuation for cryptocurrency was around $1.29 trillion as of May 2022 with Bitcoin representing a decline of 41.36% since the start of the year as stated by CoinMarketCap data.

Big price volatility

Investing in tech stocks also holds big risks. A bit like other shares, tech stock growth doesn’t necessarily predict future success. Tech stocks tend to suffer from an enormouse amount of share price volatility.

It’s notoriously hard to predict which tech companies are successful in the future. Within the rush to build hype, breathless promoters will say “this time it’s different.” But it rarely is.

Each time a replacement breed of trader will appear where they'll tell you why old-fashioned investors like Warren Buffet are behind the curve. This new crowd may have been trading for just a few months, but they insist they understand the markets.

Software as a Service Companies are a great example of overhyped valuations where they promised and delivered high revenue growth in prior years but don't seem to be so profitable (yet) to justify valuations.

However, it’s easy to cherry-pick price increases and say that we’re in a bubble, without looking at the broader context. Stocks could remain elevated for an extended period of time as profits continue to rise.

Bottom Line

With inflation at its highest levels in 40 years, it may be easy to overlook the increasing dangers posed by their valuation. It’s easy to get trapped within the euphoria, and high prices seem to guide to even higher prices. The party swirls on, until one day it doesn’t. Therefore the world’s best investors specialise in controlling their emotions because the market rises (and falls) so that they can recognize when they need to buy and when they need to tread carefully.

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