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Why Are Tech Stocks Taking Such a Beating? | WSJ - YouTube
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- [Narrator] These are just
a few of the tech companies
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whose share prices have fallen in 2022.
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(ambient music)
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And here's a chart of
the percentage change
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in the tech-heavy NASDAQ
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compared to broader indexes.
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While stocks are down in general,
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the tech industry is having
an especially hard time.
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And in April and May,
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a wave of layoffs and hiring
freezes hit the sector.
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- The story of what's happening with tech
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is not just a story about this year
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or even the last year itself,
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it's really a story about
what's been happening
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over the past decade.
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- [Narrator] While other
sectors have faced declines,
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here's why the tech industry
is having a record downturn
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after years of growth.
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10 years ago, the tech
industry was ready to grow.
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The US was still recovering
from the Great Recession,
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and interest rates were
hovering near zero.
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- The Federal Reserve is using
its monetary policy tools
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to promote a more robust recovery.
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- So. low interest rates,
they're good for tech stocks,
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lower yields make it
really, really easy to,
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they increase the appeal
of the future earnings
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that a lot of these tech stocks will have.
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- [Narrator] In 2012 and 2013,
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tech players like Facebook
and Twitter went public,
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(dramatic music)
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and advancements like
mobile and cloud technology
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helped drive profits for many companies
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and fueled growth in the sector.
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Let's go back to that NASDAQ chart.
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We can see how the tech industry
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steadily grew over the
decade as money poured in,
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outpacing growth in other industries.
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As revenue grew, companies
also expanded their workforces.
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For example,
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Facebook added about 40,000
employees to the company
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between 2012 and 2019.
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By the end of that year,
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tech was at the forefront
of the stock market,
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with a bull run being driven
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by companies like Apple and Microsoft.
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- 2010s were really the
decade of disruption
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for a lot of these tech stocks,
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we really started to be
on our phones longer,
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we started going on social media,
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and all these factors combined
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really, really increased
the allure of tech stock,
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investors wanted a piece of it.
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- [Narrator] Low interest rates
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and increased smartphone use
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were vital contributors to growth.
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- Those two factors combined together
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really made it easy to just
sort of go into the tech trade,
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and really led to the valuations
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of a lot of these tech companies
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to become really inflated, really lofty.
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- [Narrator] Then, 2020 hit.
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- The breaking news, "Stay at home!"
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That is the order tonight
from four state governors.
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- [Narrator] Stocks across the
board initially took a plunge
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as "Stay at home" orders and lockdowns
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rippled across the world.
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With more people stuck at home,
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the tech industry was set
up to capitalize on demand.
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- When the pandemic first started,
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we had all these lockdowns,
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we had travel restrictions,
and people were stuck at home.
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So what do you do when
you're stuck at home?
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You go online, and you binge
watch shows on Netflix.
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You wanna talk to your
friends, you go to Zoom.
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- [Narrator] At the same time,
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Washington enacted a
massive stimulus plan.
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The government sent out
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more than 150 million stimulus checks,
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and the fed made plans
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to lend billions of
dollars across markets.
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- We have held our policy
rate near zero since mid-March
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and have stated that we will keep it there
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until we are confident
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that the economy has
weathered recent events
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and is on track to achieve
our maximum employment
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and price stability goals.
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- The Federal Reserve
slashed interest rates,
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and they were historically ultra low.
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And that made it also very, very easy
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for a lot of these tech
companies to take on cash,
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to borrow more money.
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It lowered their borrowing costs.
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So yeah, that altogether
really helped tech stocks
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get to the levels they
were at in 2020 and 2021.
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- [Narrator] As stimulus
flooded the economy,
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market cap prices for tech leaders
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like Amazon, Apple, and
Meta reached new records.
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Some companies significantly
grew their workforces
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to meet rising demand,
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announcing increased hiring
during earnings calls
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to shareholders.
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- [David] We ended the quarter
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with over 71,900 full-time employees,
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up 23% compared to last year.
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- [Jason] We finished the quarter
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with nearly 3,800 employees,
up 134% year over year.
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- [Narrator] But growing valuations
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flashed a warning sign to some analysts,
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who speculated that companies
might not be able to keep up
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with the exploding growth.
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Inflation was beginning
to take center stage.
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- We had Federal Reserve
Chair, Jerome Powell,
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come in and say that,
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"Yeah, okay, we're now
going to start thinking
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"about raising rates to fight inflation,
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"because it seems like it
isn't temporary anymore."
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- High inflation is a severe threat
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to the achievement of maximum employment,
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into achieving a long expansion
that can give us that.
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- And that's sent investors
absolutely freaking out,
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panicking about these tech companies.
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- [Narrator] Share prices
for small tech companies
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and giants alike started to slip.
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While inflation supply, chain
issues, and the war in Ukraine
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were impacting businesses
around the world,
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tech was being faced with
other unique challenges.
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Ad revenue, which social
media companies like Snap,
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Twitter, and Facebook
rely on, has taken a hit
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as inflation led companies
to spend less on advertising.
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And apple introduced a
privacy feature last year
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that restricts user tracking,
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which means that sites have a harder time
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targeting ads to users.
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Companies now had to
redesign their ad targeting
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and tracking tools to
comply with the new rules.
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And by doing so, lost business.
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Meta estimated that
Apple's ad-tracking changes
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would cost the company
$10 billion this year.
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Another issue that caused
earnings to take a tumble
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is changing consumer behaviors.
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- So, previously, we were all at home,
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ordering stuff online again,
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and now, we're shifting back
and going back in person,
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we're going to restaurants.
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We're going to stores.
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- [Narrator] Companies
are looking to cut costs,
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having expanded when growth was booming.
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In a shareholder meeting, Meta said that-
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- [David] Given the
resulting revenue headwinds,
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we have adjusted our plans
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for hiring and expense growth this year.
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- [Narrator] Carvana CEO said in an email
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that they would cut around 2,500 workers.
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And Robinhood said in
a shareholder meeting
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on their increased hiring that-
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- [Vlad] The time we
thought that this was right
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to keep up with the pace of the business,
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but it also led to some
inefficiency, some redundant roles.
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- [Narrator] Stocks have dropped quickly
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amid poor earnings results
and the slowdown in growth.
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Now, some investors are
bailing on volatile tech stocks
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as interest rates rise.
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- So tech companies also include
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some of the most speculative
companies in the market,
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and riskier ones as well.
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So it makes it really, really hard for you
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to justify owning something
that's not gonna be profitable
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for a long time in the future to come.
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- [Narrator] It's unclear
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where the market might go from here.
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- Analyst and investors
right now remain divided
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about whether this slowdown
is going to be temporary
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or permanent.
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- [Narrator] And not all tech companies
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have been hit as hard.
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IBM and Citrix
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have both continued to
outperform the declining market,
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but with the Federal Reserve
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expected to steeply raise interest rates,
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analysts say tech stocks
will continue to suffer.
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(gentle music)
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