- Date : 15/11/2022
- Read: 3 mins
Falling tech stocks lead to Nasdaq crash
The technology sector has been witnessing a bad phase this year as the stock prices of major companies are falling. As a result, the Nasdaq index, which comprises majorly of tech stocks, has declined by more than 31%.
Furthermore, to add to the woes, the latest quarterly results of major tech companies – Apple, Google, Microsoft and Facebook – failed to impress analysts and investors. This has further intensified the bearish run of the stock market, adding to investors’ worries.
Related - Here's a look at the top 10 stock exchanges in the world
Reasons behind the Nasdaq fall
Nasdaq plays favourites to tech stocks. These stocks tend to perform brilliantly in a bullish run and fall considerably in a bearish phase.
The tech sector was waiting for a boom post-pandemic as the world realized that digitization was the road ahead. Companies expected growth in e-commerce and digital advertisements and pumped capital into different ventures to meet the expected demand surge.
However, their plans went awry when the Russia-Ukraine war started, and inflation surged on the back of the relaxed monetary policy of the Federal Reserve during the pandemic. Both these factors increased business costs, and companies started laying off people and cutting down on advertisement costs to conserve their finances. As companies struggled with their finances, their stock prices reflected the struggle, and the Nasdaq declined.
Struggles of major tech companies
Here’s a look at the financial struggles of the major tech companies that hampered their financial performance –
1. Meta (Facebook)
Mark Zuckerberg forecasted a boom in his business after the pandemic, banking on the revenue from digital advertisements. The company hired more than 87,000 people to handle the forecasted boom. It also pumped capital into Reality Labs, its metaverse project, believing that consumers won't mind the losses of the innovative and futuristic project.
However, as businesses cut their marketing budgets in the face of inflating costs and investors didn’t believe in shouldering the losses, Zuckerberg’s forecast fell flat.
2. Amazon
Amazon Web Services, owning 33% of the aggregate cloud market after Q1 FY2022, reported a muted growth after the third quarter. This impacted the company’s overall revenue.
3. Netflix
Stiff competition from other OTT platforms and spending on bad content reduced Netflix’s cash flow to just 6% of its revenue.
Reasons why tech companies are struggling
There are three main reasons behind the struggles of major tech companies. These are as follows –
1. Networking issues
Tech companies rely on customer networking to enhance their user base. However, to achieve that, they must put considerable effort to appeal to customers. Moreover, this effort might not be properly rewarded if customers fail to get impressed.
2. Low entry barriers
Cloud computing and Smartphone usage have made it easy for local businesses to enter the tech sector and pose a threat to the dominance of major players.
3. Dependence on distribution platforms
Many companies depend on distribution platforms and incur considerable expenses in hosting themselves on such platforms. This eats into their profitability.
What should investors do?
While tech stocks are falling, you don’t have to panic if you have a long-term perspective. As the market recovers, the stock values will rise again. So, stay calm, stay patient. In fact, you can invest in the falling stocks at reduced prices and then make a profit when the prices start recovering.
Related - Here are some international ETFs to invest in
Check out the 100-YTD performance of Nasdaq
The technology sector has been witnessing a bad phase this year as the stock prices of major companies are falling. As a result, the Nasdaq index, which comprises majorly of tech stocks, has declined by more than 31%.
Furthermore, to add to the woes, the latest quarterly results of major tech companies – Apple, Google, Microsoft and Facebook – failed to impress analysts and investors. This has further intensified the bearish run of the stock market, adding to investors’ worries.
Related - Here's a look at the top 10 stock exchanges in the world
Reasons behind the Nasdaq fall
Nasdaq plays favourites to tech stocks. These stocks tend to perform brilliantly in a bullish run and fall considerably in a bearish phase.
The tech sector was waiting for a boom post-pandemic as the world realized that digitization was the road ahead. Companies expected growth in e-commerce and digital advertisements and pumped capital into different ventures to meet the expected demand surge.
However, their plans went awry when the Russia-Ukraine war started, and inflation surged on the back of the relaxed monetary policy of the Federal Reserve during the pandemic. Both these factors increased business costs, and companies started laying off people and cutting down on advertisement costs to conserve their finances. As companies struggled with their finances, their stock prices reflected the struggle, and the Nasdaq declined.
Struggles of major tech companies
Here’s a look at the financial struggles of the major tech companies that hampered their financial performance –
1. Meta (Facebook)
Mark Zuckerberg forecasted a boom in his business after the pandemic, banking on the revenue from digital advertisements. The company hired more than 87,000 people to handle the forecasted boom. It also pumped capital into Reality Labs, its metaverse project, believing that consumers won't mind the losses of the innovative and futuristic project.
However, as businesses cut their marketing budgets in the face of inflating costs and investors didn’t believe in shouldering the losses, Zuckerberg’s forecast fell flat.
2. Amazon
Amazon Web Services, owning 33% of the aggregate cloud market after Q1 FY2022, reported a muted growth after the third quarter. This impacted the company’s overall revenue.
3. Netflix
Stiff competition from other OTT platforms and spending on bad content reduced Netflix’s cash flow to just 6% of its revenue.
Reasons why tech companies are struggling
There are three main reasons behind the struggles of major tech companies. These are as follows –
1. Networking issues
Tech companies rely on customer networking to enhance their user base. However, to achieve that, they must put considerable effort to appeal to customers. Moreover, this effort might not be properly rewarded if customers fail to get impressed.
2. Low entry barriers
Cloud computing and Smartphone usage have made it easy for local businesses to enter the tech sector and pose a threat to the dominance of major players.
3. Dependence on distribution platforms
Many companies depend on distribution platforms and incur considerable expenses in hosting themselves on such platforms. This eats into their profitability.
What should investors do?
While tech stocks are falling, you don’t have to panic if you have a long-term perspective. As the market recovers, the stock values will rise again. So, stay calm, stay patient. In fact, you can invest in the falling stocks at reduced prices and then make a profit when the prices start recovering.
Related - Here are some international ETFs to invest in
