Nasdaq closes out its first four-quarter slump since dot-com crash
The once high flying tech sector has endured a heavy selloff this year amid concerns that the sector’s growth could be curtailed by rising interest rates. The tech-heavy Nasdaq Composite is down more than 14%.
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A lot has changed in technology since the dot-com boom and bust.
The internet went mobile. The data center went to the cloud. Cars are now driving themselves. Chatbots have gotten pretty smart.
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But one thing has remained. When the economy turns, investors rush for the exits. Despite a furious rally on Thursday, the tech-laden Nasdaq finished in the red for a fourth straight quarter, marking the longest such streak since the dot-bomb period of 2000 to 2001. The only other negative four-quarter stretch in the Nasdaq’s five-decade history was in 1983-84, when the video game market crashed.
This year marks the first time the Nasdaq has ever fallen all four quarters. It dropped 9.1% in the first three months of the year, followed by a second-quarter plunge of 22% and a third-quarter decline of 4.1%. It fell 1% in the fourth quarter because of an 8.7% drop in December.
For the full year, the Nasdaq slid 33%, its steepest decline since 2008 and the third-worst year on record. The drop 14 years ago came during the financial meltdown caused by the housing crisis.
“It’s really hard to be positive on tech right now,” Gene Munster, managing partner of Loup Ventures, told CNBC’s Brian Sullivan on Wednesday. “You feel like you’re missing something. You feel like you’re not getting the joke.”
Other than 2008, the only other year worse for the Nasdaq was 2000, when the dot-com bubble burst and the index sank 39%. Early dreams of the internet taking over the world were vaporized. Pets.com, infamous for the sock puppet, went public in February of that year and shut down nine months later. EToys, which held its IPO in 1999 and saw its market cap grow to almost $8 billion, sank in 2000, losing almost all its value before going bankrupt early the next year. Delivery company Kozmo.com never got its IPO off the ground, filing in March 2000 and withdrawing its offering in August.
Amazon had its worst year ever in 2000, dropping 80%. Cisco fell 29% and then another 53% the next year. Microsoft plummeted by more than 60% and Apple by over 70%.
The parallels to today are quite stark.
In 2022, the company formerly known as Facebook lost roughly two-thirds of its value as investors balked at a future in the metaverse. Tesla fell by a similar amount, as the carmaker long valued like a tech company crashed into reality. Amazon dropped by half.
The IPO market this year was non-existent, but many of the companies that went public last year at astronomical valuations lost 80% or more of their value.
Perhaps the closest analogy to 2000 was the crypto market this year. Digital currencies Bitcoin and ether plunged by more than 60%. Over $2 trillion in value was wiped out as speculators fled crypto. Numerous companies went bankrupt, most notably crypto exchange FTX, which collapsed after reaching a $32 billion valuation earlier in the year. Founder Sam Bankman-Fried now faces criminal fraud charges.
The only major crypto company traded on the Nasdaq is Coinbase, which went public last year. In 2022, its shares fell 86%, eliminating more than $45 billion in market cap. In total, Nasdaq companies have shed close to $9 trillion in value this year, according to FactSet.
At its peak in 2000, Nasdaq companies were worth about $6.6 trillion in total, and proceeded to lose about $5 trillion of that by the time the market bottomed in October 2002.
Don’t fight the fed
Despite the similarities, things are different today.
For the most part, the collapse of 2022 was less about businesses vanishing overnight and had more to do with investors and executives waking up to reality.
Companies are downsizing and getting revalued after a decade of growth fueled by cheap money. With the Fed raising rates to try and get inflation under control, investors have stopped putting a premium on rapid unprofitable growth and started demanding cash generation.
“If you’re looking solely at future cash flows without profitability, those are the companies that did really well in 2020, and those are not as defensible today,” Shannon Saccocia, chief investment officer of SVB Private, told CNBC’s “Closing Bell: Overtime” on Tuesday. “The tech is dead narrative is probably in place for the next couple of quarters,” Saccocia said, adding that some parts of the sector “will have light at the end of this tunnel.”
The tunnel she’s describing is the continuing rate increases by the Fed, which may only end if the economy enters a recession. Either scenario is troubling for much of technology, which tends to thrive when the economy is in growth mode.
In mid-December, the Fed raised its benchmark interest rate to the highest in 15 years, lifting it to a target range of 4.25% to 4.5%. The rate was anchored near zero through the pandemic as well as in the years that followed the financial crisis.
Tech investor Chamath Palihapitiya told CNBC in late October that more than a decade of zero interest rates “perverted the market” and “allowed manias and asset bubbles to build in every single part of the economy.”
Palihapitiya took as much advantage as anyone of the cheap money available, pioneering investments in special purpose acquisition companies (SPACs), blank-check entities that hunt for companies to take public through a reverse merger.
With no yield available in fixed income and with tech attracting stratospheric valuations, SPACs took off, raising more than $160 billion on U.S. exchanges in 2021, nearly double the prior year, according to data from SPAC Research. That number sank to $13.4 billion this year. CNBC’s Post-SPAC index, comprised of the largest companies that have debuted via SPACs in the last two years, lost two-thirds of its value in 2022.
SPACs slumped in 2022
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‘Bargain basement’ shopping
Predicting a bottom, as all investors know, is a fool’s errand. No two crises are alike, and the economy has changed dramatically since the 2008 housing collapse and even more since the 2000 dot-com crash.
But few market prognosticators are expecting much of a bounce back in 2023. Loup’s Munster said his fund is holding 50% cash, adding that, “if we thought we were at the bottom we’d be deploying today.”
Duncan Davidson, founding partner of venture firm Bullpen Capital, expects more pain ahead as well. He looks at the dot-com era, when it took two years and seven months to go from peak to trough. As of Friday, it’s been just over 13 months since the Nasdaq hit its record price.
For private equity investors, in 2023, “I think we’re going to see a lot of bargain basement snarfing up of companies,” said Davidson, who got started in tech investing in the 1980s. To get to the market bottom, “we may have two years to go,” he said.
UK Finance Minister Rachel Reeves makes a speech during the Labour Party Conference that is held at the ACC Liverpool Convention Center in Liverpool, UK on September 23, 2024.
Anadolu | Getty Images
LONDON — British tech bosses and venture capitalists are questioning whether the country can deliver on its bid to become a global artificial intelligence hub after the government set out plans to increase taxes on businesses.
On Wednesday, Finance Minister Rachel Reeves announced a move to hike capital gains tax (CGT) — a levy on the profit investors make from the sale of an investment — as part of a far-reaching announcement on the Labour government’s fiscal spending and tax plans.
The lower capital gains tax rate was increased to 18% from 10%, while the higher rate climbed to 24% from 20%. Reeves said the increases will help bring in £2.5 billion ($3.2 billion) of additional capital to the public purses.
It was also announced that the lifetime limit for business asset disposal relief (BADR) — which offers entrepreneurs a reduced rate on the level of tax paid on capital gains resulting from the sale of all or part of a company — would sit at £1 million.
She added that the rate of CGT applied to entrepreneurs using the BADR scheme will increase to 14% in 2025 and to 18% a year later. Still, Reeves said the U.K. would still have the lowest capital gains tax rate of any European G7 economy.
The hikes were less severe than previously feared — but the push toward a higher tax environment for corporates stoked the concern of several tech executives and investors, with many suggesting the move would lead to higher inflation and a slowdown in hiring.
On top of increases to CGT, the government also raised the rate of National Insurance (NI) contributions, a tax on earnings. Reeves forecasted the move would raise £25 billion per year — by far the largest revenue raising measure in a raft of pledges that were made Wednesday.
Paul Taylor, CEO and co-founder of fintech firm Thought Machine, said that hike to NI rates would lead to an additional £800,000 in payroll spending for his business.
“This is a significant amount for companies like us, which rely on investor capital and already face cost pressures and targets,” he noted.
“Nearly all emerging tech businesses run on investor capital, and this increase sets them back on their path to profitability,” added Taylor, who sits on the lobbying group Unicorn Council for U.K. FinTech. “The U.S. startup and entrepreneurial environment is a model of where the U.K. needs to be.”
Chances of building ‘the next Nvidia’ more slim
Another increase to taxation by way of a rise in the tax rate for carried interest — the level of tax applied to the share of profit a fund manager makes from a private equity investment.
Reeves announced that the rate of tax on carried interest, which is charged on capital gains, would rise to 32%, up from 28% currently.
Haakon Overli, co-founder of European venture capital firm Dawn Capital, said that increases to capital gains tax could make it harder for the next Nvidia to be built in the U.K.
“If we are to have the next NVIDIA built in the UK, it will come from a company born from venture capital investment,” Overli said by email.
“The tax returns from creating such a company, which is worth more than the FTSE 100 put together, would dwarf any gains from increasing the take from venture capital today.”
The government is carrying out further consultation with industry stakeholders on plans to up taxes on carried interest. Anne Glover, CEO of Amadeus Capital, an early investor in Arm, said this was a good thing.
“The Chancellor has clearly listened to some of the concerns of investors and business leaders,” she said, adding that talks on carried interest reforms must be “equally as productive and engaged.”
Britain also committed to mobilizing £70 billion of investment through the recently formed National Wealth Fund — a state-backed investment platform modelled on sovereign wealth vehicles such as Norway’s Government Pension Fund Global and Saudi Arabia’s Public Investment Fund.
This, Glover added, “aligns with our belief that investment in technology will ultimately lead to long term growth.”
She nevertheless urged the government to look seriously at mandating that pension funds diversify their allocation to riskier assets like venture capital — a common ask from VCs to boost the U.K. tech sector.
Clarity welcomed
Steve Hare, CEO of accounting software firm Sage, said the budget would mean “significant challenges for UK businesses, especially SMBs, who will face the impact of rising employer National Insurance contributions and minimum wage increases in the months ahead.”
Even so, he added that many firms would still welcome the “longer-term certainty and clarity provided, allowing them to plan and adapt effectively.”
Meanwhile, Sean Reddington, founder and CEO of educational technology firm Thrive, said that higher CGT rates mean tech entrepreneurs will face “greater costs when selling assets,” while the rise in employer NI contributions “could impact hiring decisions.”
“For a sustainable business environment, government support must go beyond these fiscal changes,” Reddington said. “While clearer tax communication is positive, it’s unlikely to offset the pressures of heightened taxation and rising debt on small businesses and the self-employed.”
He added, “The crucial question is how businesses can maintain profitability with increased costs. Government support is essential to offset these new burdens and ensure the UK’s entrepreneurial spirit continues to thrive.”
Apple CEO Tim Cook (C) joins customers during Apple’s iPhone 16 launch in New York on September 20, 2024.
Timothy A. Clary | Afp | Getty Images
Apple’s second-largest division after the iPhone has turned into a $100 billion a year business that Wall Street loves.
In Apple’s earnings report on Thursday, the company said it reached just under $25 billion in services revenue, an all-time high for the category, and 12% growth on an annual basis.
“It’s an important milestone,” Apple CFO Luca Maestri said on a call with analysts. “We’ve got to a run rate of $100 billion. You look back just a few years ago and the the growth has been phenomenal.”
Apple first broke out its services revenue in the December quarter of 2014. At the time, it was $4.8 billion.
Apple’s services unit has become a critical part of Apple’s appeal to investors over the past decade. Its gross margin was 74% in the September quarter compared to Apple’s overall margin of 46.2%.
Services contains a wide range of different offerings. According to the company’s SEC filings, it includes advertising, search licensing revenue from Google, warranties called AppleCare, cloud subscription services such as iCloud, content subscriptions such as the company’s Apple TV+ service, and payments from Apple Pay and AppleCare.
On a January 2016 earnings call, when the reporting segment was relatively new, Apple CEO Tim Cook told investors to pay attention.
“I do think that the assets that we have in this area are huge, and I do think that it’s probably something that the investment community would want to and should focus more on,” Cook said.
Over the years, Apple has compared its services business to the size of Fortune 500 companies, which are ranked by sales, to give a sense of its scale. After Thursday, Apple’s services business alone, based on its most recent run rate, would land around 40th on the Fortune 500, topping Morgan Stanley and Johnson & Johnson.
Services appeals to investors because many of the subscriptions contained in it are billed on a recurring basis. That can be more reliably modeled than hardware sales, which will increase or decrease based on a given iPhone model’s demand.
“Yes, the the recurring portion is growing faster than the transactional one,” Maestri said on Thursday.
Apple’s fourth-quarter results beat Wall Street expectations for revenue and earnings on Thursday, but net income slumped after a one-time charge as part of a tax decision in Europe. The stock fell as much as 2% in extended trading.
Apple boasts to investors that its sales from Services will grow alongside its installed base. After someone buys an iPhone, they’re likely to sign up for Apple’s subscriptions, use Safari to search Google, or buy an extended warranty.
Apple also cites a “subscription” figure that includes both its first-party services, such as Apple TV+ subscriptions, and users who sign up to be billed by an App Store app on a recurring basis.
The company said the installed base and subscriptions hit all-time-highs, but didn’t give updated figures. Apple said it had 2.2 billion active devices in February, and in August said it had topped 1 billion paid subscriptions.
Still, Apple faces questions about how long its services business can continue growing at such a rapid rate. Between 2016 and 2021, the unit sported significantly higher growth, reaching 27.3% at the end of that stretch.
In fiscal 2023, services growth dropped to 9.1% for the year, before recovering to about 13% the next year. Apple told investors that it expected services growth in the December quarter to be about what it was in fiscal 2024.
Cook was asked on Thursday what Apple could do to make some of its services and its Apple One subscription bundle grow faster.
“There’s lots of customers to try to convince to take advantage of it,” Cook said. “We’re going to continue investing in the services and adding new features. Whether it’s News+ or Music or Arcade, that’s what we’re going to do.”
WATCH: Apple has a big leg up in AI
Amazon CEO, Andy Jassy speaking with CNBC’s Jim Cramer on Mad Money in Seattle, WA. on Dec. 6th, 2023.
CNBC
Amazon CEO Andy Jassy is trying to reassure investors who may be worried about the future payoff of the company’s massive investments in generative artificial intelligence.
On a conference call with analysts following the company’s third-quarter earnings report on Thursday, Jassy pointed to the success of Amazon’s cloud computing business, Amazon Web Services, which has become a crucial profit engine despite the extreme costs associated with building data centers.
“I think we’ve proven over time that we can drive enough operating income and free cash flow to make this a very successful return on invested capital business,” Jassy said. “We expect the same thing will happen here with generative AI.”
Amazon spent $22.6 billion on property and equipment during the quarter, up 81% from the year before. Jassy said Amazon plans to spend $75 billion on capex in 2024 and expects an even higher number in 2025.
The jump in spending is primarily being driven by generative AI investments, Jassy said. The company is rushing to invest in data centers, networking gear and hardware to meet vast demand for the technology, which has exploded in popularity since OpenAI released its ChatGPT assistant almost two years ago.
“It is a really unusually large, maybe once-in-a-lifetime type of opportunity,” Jassy said. “And I think our customers, the business and our shareholders will feel good about this long term that we’re aggressively pursuing it.”
AI spending was a big topic on tech earnings calls this week. Meta on Wednesday raised its capital expenditures guidance, and CEO Mark Zuckerberg said he was “quite happy” with the team’s execution. Meanwhile, Microsoft‘s investment in OpenAI weighed on its fiscal first-quarter earnings released on Wednesday, and the company said capital spending would continue to rise. A day earlier, Alphabet CFO Anat Ashkenazi warned the company expects capital spending to grow in 2025.
Amazon has said its cloud unit has picked up more business from companies that need infrastructure to deploy generative AI models. It’s also launched several AI products for enterprises, third-party sellers on its marketplace and advertisers in recent months. The company is expected to announce a souped-up version of its Alexa voice assistant that incorporates generative AI, something Jassy said will arrive “in the near future.”
Amazon hasn’t disclosed its revenue from generative AI, but Jassy said Thursday it’s become a “multi-billion-dollar revenue run rate” business within AWS that “continues to grow at a triple-digit year-over-year percentage.”
“It’s growing more than three times faster at this stage of its evolution as AWS itself grew, and we felt like AWS grew pretty quickly,” he added.
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