Are Tech Stocks Doomed?

The news of the technology (or tech) sector getting a big hit is everywhere, and so is the subsequent layoff news that followed: Meta had laid off some 11,000 jobs; Twitter had axed around 3,700 (though some may had left due to their own volition)¹ and our locally based Sea Ltd had cut around 10% of its workforce for the past six months². 

Even earlier in late 2020, China had begun its tough regulatory measures such as antitrust and data security on its own technology firms e.g., Alibaba and Tencent³. Though signs of easing were seen since June 2022, the continued Covid-related lockdowns dampened the recovery.

 

Flashback to the onset of the pandemic around two and a half years ago, tech stocks were seen as the darlings and the “new world order” in the post-pandemic world, in which even myself had held that opinion (and still has). Prices of technology and its related shares soared, with pandemic-friendly counters such as Netflix and Zoom went uphill and plateaued between 2020 and 2021, before coming back down again starting this year.

 

There were several reasons, both actual and deemed, for this. The main one would be rising interest rates, and the other was the return of the pre-Covid normalcy. From a valuation point, the prices of these stocks were overvalued due to the hype, and the two aforementioned factors caused them to go back to Earth. Some even attributed it to the fall of cryptosphere. Whatever the cause and/or effect, in my opinion, there is no single big variable but a multitude of them that resulted in this tech bust.

 

In the long run, the tech sector will still see growth in the form of new products and services. Innovation is an infinite resource and this applies well in the world of tech. Sounds inspirational? Well, making these statements are the easy part, and operationalizing them is the more difficult aspect. 

 

First, the tech sector is huge and often interconnected with other sectors and industries. For instance, Apple is a tech company but also a lifestyle one; Tesla is a tech company but also into electric cars; Netflix is a tech company but also provides entertainment content, and so on.

 

Second, selecting a potential successful tech company is difficult, especially when there are so many players around in almost the same field. Going back to the pre-Dot Com bust period of the late 1990s, there were a few listed internet search firms (Excite, Lycos, Yahoo, Infoseek, etc.), and did we know then that Yahoo would prevail (at least till the mid/late noughties)?

 

If individual picking is hard for you, then perhaps we can go the exchange traded fund (ETF) way. There are a number of tech ETFs, and thematic ETFs that touched on tech-related stuff (green energy, electric cars, cybersecurity, etc.). Investing in ETFs would bring about slower growth as compared to (hopefully) picking the winning company, but at least it is diversified enough to provide a buffer.

 

The last word: tech is still a sector/industry (although is broad-based), and I would advise diversifying into other sectors/industries and asset classes to give a broader exposure to the financial markets in general. A tech-concentrated portfolio would be more doomed than a diversified portfolio with different asset classes, regions/countries and sectors/industries, in the event of a market downturn.

 

1 – Wamsley, Laurel. It’s the end of the boom times in tech, as layoffs keep mounting. NPR. 16 Nov 2022. https://www.npr.org/2022/11/14/1136659617/tech-layoffs-amazon-meta-twitter (accessed 17 Nov 2022)

 

2 – Reuters Staff. Sea Ltd laid off 10% of workforce over past six months – The Information. Reuters. 15 Nov 2022. https://www.reuters.com/article/instant-article/idINL4N32A4CI (accessed 17 Nov 2022)

 

3 – Zheping, Huang. In Just One Year, Beijing’s Crackdown Has Changed Corporate China Forever. Bloomberg. 2 Nov 2022. https://www.bloomberg.com/graphics/2021-china-tech-crackdown-one-year(accessed 17 Nov 2022)