With all industries are converting to software and every person on the planet moving towards owning a smartphone it surprises me that there’s an ongoing narrative that tech is collapsing.
The fact everything uses software doesn’t mean Slack, a generic chat platform with dozens of absolutely identical products, being acquired for 27.7 billion dollars ever made sense.
That generic software company was valued higher than entire industries that supply components that all hardware depends on. Tech isn’t collapsing. But valuations were and continue to be fuckin nuts for a lot of companies and are coming down to more reasonable numbers, which look like collapses.
Tech seems somewhat unique because you can start a new company and within a relatively short period of time (<10 years) you can threaten the eventual existence of Fortune 500 incumbents. The entire venture capital/startup ecosystem exists to identify these upstarts and help them obtain unstoppable momentum as quickly as possible. If the incumbents want to survive, they usually have to pay up, and the longer they wait, the more expensive it will be. This is why Adobe pays $20 billion for Figma. Greed is good, but fear is better - for the startup looking to be acquired. There are a handful of other Figmas out there (and more will be started) and that is part of why tech has so much value.
Another fun example of looking at valuations versus actual real world production and output (real value delivered?): Tesla for a period was valued at a higher market cap than Toyota, the largest auto manufacturer in the world. Consider the real world infrastructure and output of Tesla, and the real world infrastructure and output of Toyota. Toyota is an order of magnitude larger operation.
So for Telsa's valuation to mate with it's real world ambition, it has be aiming to have it's operations as big as Toyota's, great! Being as big as Toyota would put it's market cap at... oh. Less than it currently is.
Out of all companies you choose Slack, the only one that I actually think deserves an insane valuation. So many products that are just Slack integrations and that companies fully rely on. Have you worked at a big company and seen what happens when Slack goes down?
Collaboration tools are some way from being systems of record and there is substantial difference between competitors. Generic chat apps are not yet useful enough (despite years of development) for most companies - IRC failing to win is evidence of this and so is the fact that companies aren’t switching en masse to run their infrastructure on whatever is the OSS flavour of the day. That doesn’t mean it won’t happen some day, but that day won’t be soon.
When coupled with the fact that there are still a huge number of companies which haven’t yet converted to using these tools and purchasing the market leader for a premium makes total sense.
With regards to component supply - companies that are producing unique chips are worth plenty, where as those that are making COTS components aren’t.
Obviously tech itself isn't collapsing -- it's the astronomical growth that's collapsing, and much of valuation is based on growth. Now it's turning into merely "normal" growth. But that's all investor-side.
Consumer-side, it's really more about tech maturing. If we take your example of owning a smartphone, it means that most people already have smartphones, and since the yearly upgrades are much more incremental now, people don't need to upgrade as often.
If by tech we mean everything touched by Moore's law, all this degrowth seems also to be a consequence of the lengthening of the doubling time in flops and words. Ultimately what you mean by normal growth would then be the replacement rate of your old computer by a new but not more powerful computer.
Tech stock prices are based on extreme growth numbers. the problem is the denominator, it's so big for most tech companies they can't continue to grow at 20-50% a year. so if your P/E goes from 30+ to 10 or worse 3-5even if your E is still strong but flat alot of wealth disappears. if people feel broke they don't spend money on things. the new phone isn't as important as say eating. also alot of tech didn't have to compete and could still grow wildly. name a non-competitive area of tech these days? a blue sky opportunity. that doesn't entail hard engineering. autonomous cars, fusion, solar all require massive amounts of slog it out engineering.
I've often thought this too, but there are several huge exceptions to this, whilst outside of tech there are plenty of similar examples.
First and foremost, there's the Exceptions:
Google: P/E is more or less 20, decades already
Microsoft: P/E is more or less 20, for a very long time
There are not actually that high. Compare to BABA (P/E is >200), IBM (P/E >100), JD (P/E >600)
And the reverse exceptions, non-tech with absurd P/E:
Tesla: P/E is 40 (down from ~500 I might add)
Boston Scientific: P/E is >100
and let's just shut up about crypto, because ... there's is a theme. Overwhelmingly the ridiculous valuations are financial companies and "semi-"government companies (meaning protected by government, but not benefitting the people of the country that government governs. Like BABA for example, or before their downfall, Theranos). If Tech becomes the P/E champion instead of "almost-but-not-quite" corruption companies that tend to dominate that, I feel that's a very good thing indeed.
Tech =|= software =|= start-up. Those three things are unrelated, and the tendency to equate tech with software let a lot of issues on all fronts in the last decade or so.
Only economically non-sensical ventures will collapse. Tech will be always strong, but not always overvalued or able to open market with limitless VC capital.
pigsty|3 years ago
That generic software company was valued higher than entire industries that supply components that all hardware depends on. Tech isn’t collapsing. But valuations were and continue to be fuckin nuts for a lot of companies and are coming down to more reasonable numbers, which look like collapses.
nugget|3 years ago
ehnto|3 years ago
So for Telsa's valuation to mate with it's real world ambition, it has be aiming to have it's operations as big as Toyota's, great! Being as big as Toyota would put it's market cap at... oh. Less than it currently is.
MonkeyClub|3 years ago
But it’s still fueled by hype, so unless a strong enough crash comes, it’ll keep bubbling up.
Kiro|3 years ago
georgebarnett|3 years ago
When coupled with the fact that there are still a huge number of companies which haven’t yet converted to using these tools and purchasing the market leader for a premium makes total sense.
With regards to component supply - companies that are producing unique chips are worth plenty, where as those that are making COTS components aren’t.
crazygringo|3 years ago
Consumer-side, it's really more about tech maturing. If we take your example of owning a smartphone, it means that most people already have smartphones, and since the yearly upgrades are much more incremental now, people don't need to upgrade as often.
kalimanzaro|3 years ago
sharemywin|3 years ago
candiodari|3 years ago
First and foremost, there's the Exceptions:
Google: P/E is more or less 20, decades already
Microsoft: P/E is more or less 20, for a very long time
There are not actually that high. Compare to BABA (P/E is >200), IBM (P/E >100), JD (P/E >600)
And the reverse exceptions, non-tech with absurd P/E:
Tesla: P/E is 40 (down from ~500 I might add)
Boston Scientific: P/E is >100
and let's just shut up about crypto, because ... there's is a theme. Overwhelmingly the ridiculous valuations are financial companies and "semi-"government companies (meaning protected by government, but not benefitting the people of the country that government governs. Like BABA for example, or before their downfall, Theranos). If Tech becomes the P/E champion instead of "almost-but-not-quite" corruption companies that tend to dominate that, I feel that's a very good thing indeed.
hef19898|3 years ago
georgebarnett|3 years ago
ngoilapites|3 years ago
unknown|3 years ago
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BeFlatXIII|3 years ago
newaccount2021|3 years ago
[deleted]
balsam|3 years ago
From TFA: “But just as chip production bloomed, demand withered, thanks to falling sales of pcs and smartphones.”
The narrative is apparently backed by data. Where’s the data for your counternarrative