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Why tech investors can’t escape this brutal bear market

May 10, 2022, 5:00 PM UTC

If any tech sector could avoid this month’s market onslaught, the semiconductor industry seemed like a decent bet.

Chip companies are coming off a banner quarter, with Nvidia, Intel, AMD, Qualcomm, and Broadcom all beating analyst revenue and earnings forecasts. Semiconductor profits are sky-high, as developers and manufacturers take advantage of COVID-induced supply shortages and strong demand for electronics. Well-established companies with solid balance sheets dominate the landscape, offering some reprieve to startup-weary investors.

But even chipmakers are feeling the pain of this sudden bear market. SOXX, BlackRock’s market-cap–weighted index of 30 U.S. semiconductor companies, has fallen 27% year to date, roughly in line with the tech-heavy Nasdaq 100. Shares in Nvidia, the sector’s biggest U.S.-based player, are down 40% despite record first-quarter revenue that jumped 84% year over year.

The chip stock selloff signals an uncomfortable truth dawning on tech investors: There’s no safe harbor in this storm.

As the markets continue to buckle under several concurrent pressures—high inflation, rising interest rates, global economic uncertainty, persistent supply chain problems, among others—virtually all corners of the industry are feeling the pain.

The nation’s largest tech companies have stumbled over various hurdles in recent months, including a slowdown in e-commerce sales and manufacturing output. As CNBC noted, seven mega-cap corporations—Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla—combined to shed $1 trillion in valuation over the past three trading days. On average, their shares are down 29% year to date.

Promising upstarts also continue to tank, as investors shun firms nowhere near operating profitability. A host of recent IPO darlings—including Coinbase, Lucid, Rivian, Robinhood, and Snowflake—are off at least 65% from their 52-week highs, with no signs of the trend reversing anytime soon.

Even industries with strong short- and long-term growth outlooks can’t avoid the drop. The Nasdaq’s CTE Cloud Computing Index has tumbled 36% year to date, while its ISE Cloud Computing Index has dropped 16% this month after holding relatively steady through April.

“While not everyone deserves to suffer from a broader correction, it was bound to happen,” Bloomberg columnist Parmy Olson wrote Monday. “Many tech valuations were indefensible.”

The recent downturn also undercut the idea that crypto served as a savvy hedge against inflation. 

On Monday Bitcoin sank below $30,000 for the first time since last July, as the world’s most popular cryptocurrency moved in concert with global equities. In addition, Terra’s UST stablecoin failed to live up to its name Monday, losing its peg to the U.S. dollar. The coin dipped as low as 66 cents in value before rebounding to 91.62 cents—still solidly below its theoretical $1 constant—as of Tuesday afternoon.

“The longer that this persists, the more that this will increase the pressure on Bitcoin and add to investors’ anxiety,” Michael Safai, managing partner at Dexterity Capital, a quantitative trading firm focused on cryptocurrency, told Fortune’s Taylor Locke on Monday.

Investors and analysts remain decently optimistic that the selloff represents a rational rightsizing after last year’s Fed-fueled buying bonanza. The tech industry today is far more mature and profitable as compared to the traumatic dotcom bubble, easing fears of a generationally bad crash.

In the meantime, find shelter wherever you can. As Nick Colas, cofounder of DataTrek Research, told Vox: “There is never a safe haven when the storm is in full force.”

Want to send thoughts or suggestions for Data Sheet? Drop me a line here.

Jacob Carpenter

NEWSWORTHY

Spinning its wheels. Peloton shares fell another 6% in midday trading Tuesday after a dreadful earnings report added to the embattled fitness company’s troubles, Bloomberg reported. Peloton fell short of analysts’ revenue estimates, posted huge losses that far exceeded market forecasts, and issued weak guidance for the current quarter. Company officials have sought to reboot the flagging firm by replacing CEO and cofounder John Foley, exploring a sale of up to 20% of the company, and securing $750 million in five-year term debt. Peloton shares are down 91% from an all-time high set in January 2021.

Stopping the presses. Tesla’s Shanghai manufacturing plant experienced a dramatic slowdown Tuesday as the electric-auto maker struggled to acquire parts amid COVID lockdowns in China, Reuters reported. An internal memo showed that plant leaders expected to produce less than 200 vehicles Tuesday, down from its 1,200-unit daily output in recent weeks. The reduction follows a three-week shutdown of Tesla’s Shanghai plant in April, which stemmed from a strict government-ordered lockdown aimed at curbing COVID spread in the region.

No love lost here. The online dating company Match Group filed a lawsuit Tuesday against Google, alleging that the Alphabet unit’s app store policies violate state and federal antitrust laws, Axios reported. Match, the company behind Tinder, Hinge, and several other popular dating brands, takes issue with the requirement that developers use Google Play Billing to process in-app payments. Match officials argue the mandate lets Google take an outsize cut of in-app revenues on Android operating systems. Google officials described the lawsuit as a “self-interested campaign to avoid paying for the significant value” provided by the tech giant.

A victory for privacy. The controversial facial recognition company Clearview AI agreed Monday to stop selling access to its massive image databases to private businesses or individuals, the Associated Press reported. The concession came as part of a legal settlement in a case brought by the American Civil Liberties Union and other organizations, which alleged that Clearview AI violated Illinois digital privacy laws. A state court judge must still approve the settlement. Clearview AI retains the right to sell access to billions of facial images, many of them pulled from Facebook and Instagram without users’ consent, to the federal government and state and local law enforcement agencies outside Illinois.

FOOD FOR THOUGHT

Out of the red. Slowly but surely, that old standby IBM is once again finding its footing. And as TechCrunch noted Tuesday, a costly bet four years ago on software company Red Hat is propelling the mini-renaissance. The 111-year-old company notched a relatively strong first quarter of 2022, topping analysts’ sales and earnings expectations. The $34 billion acquisition of Red Hat helped drive the increase, as IBM banks on growth in the hybrid cloud space. Red Hat still operates as an independent subsidiary, though IBM has described the unit as a foundational cornerstone of its fast-evolving cloud approach.

From the article

In the most recent quarterly report, IBM revenue grew 8%. That may not seem like a ton of growth, but after almost a decade of negative reports, this is what the company has been looking for. Red Hat was a leading contributor to that result with 18% growth, while the broader hybrid cloud business grew 14%, all good signs for Big Blue.

Bola Rotibi, an analyst at CCS Insight, said that Red Hat is a big part of IBM’s growth strategy and helped push the successful quarter. “Ultimately, IBM has started its fiscal year with solid first-quarter revenue growth on the back of healthy business operations across its reporting segments, but especially with respect to the company’s hybrid cloud and AI operations,” she said.

IN CASE YOU MISSED IT

Cathie Wood shocks the market after dumping $12.7 million of Tesla stock to snap up some in General Motors, by Christiaan Hetzner

Cryptocurrencies are collapsing: Here’s how much $1,000 would be worth today if you had invested earlier, by Chris Morris

Elon Musk’s Tesla factory workers sleeping on-site and working 12-hour shifts six days a week, by Chloe Taylor

Famed short-seller betting Elon Musk tanks Twitter stock by slashing his takeover bid, by Christiaan Hetzner

Hedge fund loses $17 billion in tech selloff in one of history’s biggest dollar declines, by Chloe Taylor

“You have blood on your hands”: Russian smart TVs and online platforms hacked with antiwar messages on Victory Day, by Sophie Mellor

A DeFi platform just got an S&P credit rating for the first time ever. It was junk, by Taylor Locke

BEFORE YOU GO

Give them a red card. FIFA, soccer’s global governing body, is a greedy cabal bent on bribing its way to maximum profits and turning a blind eye to human rights abuses. FIFA did, however, have two things going for it: the quadrennial World Cup and an eponymous video game (most recently, FIFA 22). But like everything else it touches, FIFA screwed that up, too. As the New York Times reported Tuesday, video game developer Electronic Arts couldn’t reach a deal with the organization to continue using its name on the insanely popular FIFA soccer series. The Times said that FIFA wanted about $300 million to license its name and World Cup property to Electronic Arts, double its current haul. Though fear not, football fanatics: The game will still move forward, rebranded as EA Sports FC, via licensing deals with clubs and leagues around the globe.

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