History never repeats itself – not exactly anyway. But while the tech sector is now massively more developed than it was 20 years ago, there are clear echoes today of the bursting of the dot.com bubble in March 2000. Back then, tech company shares were hugely overvalued and there was a rush of IPOs to the market, supported by little more than hope that the companies involved could grab market share in the online “gold rush”. The fallout hit jobs, wealth and economic growth.
Now the sector has “got ahead of itself” again, with stock market valuations falling from early this year and then the round of big job cuts and industry turmoil. So, what lessons can we learn from the last time the bubble burst and what does this mean for the tech sector in Ireland?
1. Stock market valuations can rise well beyond justified norms
Stock market valuations are meant to be based on logic, traditionally to reflect the future earnings of companies. The dot.com boom was not the first time that rationality took a back seat, but it was one of the most spectacular. The Nasdaq index rose from roughly 1,000 in 1995 to more than 5,000 at its peak in early 2000, before collapsing to 1,140 in October that year. The scale of investor wealth destruction was extraordinary, and by the late stages many smaller investors were involved.
The spectacular valuations of IPOs in late 1990s – anything with a name ending in dot.com seemed to attract a stellar number – has not been repeated this time. But the value put on many firms had started to look very frothy and the Nasdaq is down nearly 30 per cent this year, even after some recovery in recent weeks. The valuation of some big players has crashed. Meta shares are down 66 per cent this year to date, for example. It is very hard to know how market trends will play out. But a lesson from the dot.com era is that share valuations can take years to recover bubble levels again. The Nasdaq did not recover its pre-crash highs until 2015. Microsoft’s share prices did not reach its pre-bubble highs until 2015, Oracle until 2016 – Amazon managed to do so in 2009.
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Many smaller companies which had gone to the market in the year or two before the crash collapsed – some had reached market valuations in the billions, despite never having made a profit. Billions were spent on marketing in an attempt to grab market share in the new frontier land of the internet, but the underlying business models were flawed. This time around, many smaller venture-capital backed companies are also facing big questions over their valuations, which could have a big impact on future funding rounds. They have joined the big players in announcing lay-offs.
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How do markets get things so wrong? US investor Paul Graham – whose company has funded hosts of start-ups – wrote after the dot.com bubble bust, that “despite the nonsense we heard during the bubble about the new economy, there was a core of truth” which, he said was necessary so that even “very smart people” were sucked in. This was the potential of the online world, from which companies made many billions in the meantime. It is just that then. as well as now, companies investing to grab market share and investors trying to back them can come unstuck. The tech business cycle can turn down sharply, even though, in the long term, technology will be central to our lives. And then, as now, the mood can turn rapidly, even though problems have been bubbling away in the background for some time. As Hemingway wrote about bankruptcy, these things happen “gradually, then suddenly”.
2. Tech is not divorced from the real economy
Despite the massive growth of tech in our lives and the structural growth of the sector, it is affected by real economic factors. Back in 2000, the dawning of reality in March followed a steady pattern of interest rate increases by the US Fed which had started in 1999. Three years earlier, Fed chairman Alan Greenspan had warned of “irrational exuberance” in the markets, but nobody had listened. Japan was also slipping into recession and company profit warnings were starting. The turn in the tech sector helped to push the US economy into recession in 2001, assisted by the terrorist attacks of September 11th.
Is the tech crunch a correction or a calamity?
The job losses announced by Meta and Stripe may provide an indication of layoffs across the tech sector. Inside Business is analysing the impact of the redundancies, announced over the past week, across the wider Irish economy. After enjoying bumper profits and a surge in recruitment during the pandemic, interest rate rises and the cost of living crisis have finally caught up with the tech giants. But is the crunch merely a recalibration of the sector or a more foreboding warning of global recession? Ciaran Hancock, Cliff Taylor and Laura Slattery analyse how prepared we are to absorb the losses, what the impact on the commercial property market will be and does the IDA have a Plan B should the multinationals pare back significantly.
The same pattern of growth fears and higher interest rates is present this time. Brian Caufield, chairman of Scale Ireland which represents the indigenous tech sector, says that big public companies and smaller VC-based firms are facing somewhat different issues. Bigger companies are hit by the economic slowdown and particularly the fall-off in online advertising. Tech market sources point out that tech advertising is very sensitive to economic growth and would be likely to fall faster than GDP in a recession. This is what has hit the share prices of companies such as Meta and Twitter so hard.
Smaller VC-backed companies may still be seeing rising demand for their products, Caufield says, but face questions about funding. With interest rates rising, the bar for investment is rising and the poor sentiment in the sector is also hitting home. Smaller firms will be trying to adjust and save money to avoid having to raise funds for now, Caufield says. They will want to avoid a “down around” – raising money at a much cheaper rate than previous funding rounds, upsetting earlier investors and sending out a negative message. Again, these pressures can drive cost cutting. As happened in 2000, the focus is now on profits, not just growth in revenue.
3. Company specific factors
Many dot.com companies went bust in 2000/2001, despite being valued at billions of dollars on the market. An oft quoted example is Priceline.com, which created an online market for unsold airline seats and had a peak market valuation of close to $10 billion (€9.7 billion) even as it was losing tens of millions of dollars every month. It never made it – nor did many others with a dot.com handle. While the internet has taken on a key role in clearing markets and matching buyers and sellers, it took time for viable models to emerge.
Within the tech sector, there are always winners and losers and, as a country heavily reliant on the sector – and on a few big companies within it – this is a big deal for the Republic. If one or two of the big tech taxpayers have a few unprofitable years, or have to restructure, then this could have a significant impact on tax and jobs here. Meta, for example, clearly faces a lot of investor questions. Hit by the fall in online advertising, it is also facing big competition from Chinese company TikTok and is being affected by changes in Apple’s operating system which make it more difficult to confirm a download or sale from an online ad. Earlier this year the company warned this Apple factor could cost it $10 billion in 2022.
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For smaller tech companies, meanwhile, the price of a mistake or a short-term issue are much higher now than, say, a year ago. Markets, and funders, overshoot and so things that would have been overlooked in the past may now by over-interpreted. A vital issue in the weeks ahead is whether the funding position of the sector can stabilise, or whether the ‘sell now and ask questions later’ mentality of the dot.com crash takes hold.
4. Real impacts can take time to work through
The dot.com bust was a key factor pushing the US economy into recession in 2001 and leading to major sectoral job cuts. Between 2001 and 2004, Silicon Valley lost 200,000 jobs. Now we are seeing the real impacts again. As job cuts start internationally, Caufield says it appears that the big quoted players are taking the decision to make sharp cuts now to try to reposition themselves and that a “tough enough couple of years” may lie ahead. He says that the withdrawal of funding from the sector has more echoes of the dot.com bust than he had expected – but that overall he remains optimistic: “I don’t believe the market for tech and innovation is going to go away.”
Market sources say it will take time for the impact on the Irish ICT sector to be clear. Having added more than 25,000 jobs since 2019 to employ over 123,000 by September (according to CSO administrative data), some market sources believe that 8,000 to 10,000 jobs could go in the months ahead, if the scale of cutbacks in some of the big players is repeated across the sector. The net jobs position could be protected to some extent by people getting re-employed in companies not cutting back. The latest figures show that as of September, jobs in the sector appeared to have topped out, but were not yet falling. A vital few months lie ahead. For now this looks like a painful correction in a sector which expanded too fast, but will still be a vital part our economic future. Dermot O’Leary, Goodbody chief economist, said that what has happened does not – and should not − change Ireland’s business model. The policy response needs to “look through” the short-term issues and focus on how Ireland can position itself in the longer term.
