Forrest Li Losing billions in net worth is par for the course in the tech world

The sell-off in tech stocks around the world in recent weeks has been nothing short of brutal.

It wiped out the fortunes of tech tycoons – US$1 trillion (S$1.37 trillion) from the world’s 500 richest people. Sea Limit (NYSE: SE), founder Forrest Li lost 80% of his US$22 billion net worth, while from Amazon (NASDAQ: AMZN) Jeff Bezos lost $58 billion.

The Nasdaq, a US index home to many tech companies, has fallen more than 20% since its last peak in November 2021, entering bearish territory. The drop in tech stocks, which lasted seven weeks, is the longest sustained weekly decline since 2001, when the dotcom bubble burst.

The broader U.S. market is sailing precariously close to the wind, with the S&P 500 down 19% from its January peak. Only 131 of the 500 meters have managed to deliver a positive performance since the start of the year.

Many of these companies in the black are directly or indirectly linked to the oil industry which has profited from soaring crude prices. So should we be worried about the tech crisis?

Dot.com the sequel

Investors, it seems, are no longer in love with tech companies. This has led some experts to draw parallels with the bursting of the dot-com bubble two decades ago.

Back then, tech stocks were flying high in hopes that the internet would cause a paradigm shift in how we do business and, perhaps more importantly, how we go about our daily lives.

Similarly, some believe that today’s next generation of disruptive tech companies could change the way we manage finances, consume media, and perform daily tasks.

But there are distressing similarities between the stock price performance of these disruptive companies today and what happened to many dot-com companies at the turn of the millennium.

In 2000, most dot-com companies hoped the Internet would allow them to challenge the dominance of established companies. Investors were happy to buy into the new paradigm. They were keen to invest at almost any valuation, even if the business was still unprofitable and unlikely to turn a profit.

When the penny dropped to the point that many did not have the ability to survive, many businesses collapsed dramatically. Online pet store Pets.com was valued at more than US$400 million at its peak, when its shares traded for as much as US$14 each after its IPO in 2000. When its bankruptcy was announced barely nine months later, its shares plummeted 98 percent. cent to just US$0.22.

Similarly, fashion retailer Boo.com collapsed when it burned through $120 million in venture capital in 18 months.

We’re not quite at that stage of selling the technology right now. Tech companies today actually have a business plan rather than a flaky idea written on the back of a napkin.

For example, Pets.com didn’t really realize that many of the products sold on its website could be easily purchased at a store just around the corner. Why would a buyer wait days to receive the items they ordered when they could just get them immediately?

However, the headwinds facing many disruptive companies bear uncanny similarities to the events of 2000. These include rising interest rates to rein in inflationary pressures, excessive liquidity and excessive stock market exuberance.

A sea of ​​red

There are already signs that investors are increasingly wary of high-value companies. A high valuation generally means that investors are paying money today for benefits that may not materialize for years.

It was good when interest rates were close to zero. But waiting for profits to rise becomes more costly when interest rates rise.

For example, Sea Limited, which was not yet profitable, was valued at 21 times annual sales in 2020. These fell to 12 times annual revenues in 2021.

Today, the market is only willing to pay $3.30 for every dollar of 2021 revenue that Sea Limited might make this year. The compression of Sea Limited’s price-to-sales ratio, as well as the Chinese tech giant Tencent (HKSE: 0700) selling its stake in January caused Sea’s share price to fall 80% from its October 2021 high.

Meanwhile, there are concerns that the company has spread too thinly by using funds from its profitable Garena division to prop up its loss-making shopping platform Shopee.

Sea Limited is not alone. Prior to listing in the United States, another unprofitable company, Seize assets (NASDAQ: GRAB), has been valued at more than 100 times annual revenue. That figure fell to 40 times sales in 2021 before dropping to just 11 times projected revenue this year.

Somewhere else, PropertyGuru (NYSE: PGRU), which floated on the New York Stock Exchange in March, has seen its price plummet 50% since its IPO.

Tough market conditions have affected fledgling companies hoping to go public this year. Singapore’s online marketplace operator Carousell, which was to be valued at US$1.5 billion, has reportedly abandoned plans to go public through blank check companies or SPACs.

Amazon’s survival strategy

The outlook for tech companies looks ominous. But they can at least take comfort in the fact that not every dot-com company went bankrupt in 2000.

Amazon has been a notable survivor. He was able to do this because he managed to raise US$672 million in cash just months before the stock market crashed.

Another factor that worked in Amazon’s favor was its robust business model. He was able to collect money from customers before his suppliers were paid. Its negative cash conversion cycle effectively provided Amazon with “free money” to grow its business.

Today’s tech companies should learn from Amazon’s playbook. The e-commerce platform, which started as an online bookstore, has survived thanks to its ability to generate free cash flow to grow its business and sell more books. The more books he sold, the greater his negotiating position with suppliers to obtain longer payment terms.

While Amazon has survived the dot-com crash to become an internet juggernaut, it hasn’t been spared the recent tech sell-off. Its shares fell 36% for the year after the tech giant reported slowing growth in online sales.

But Amazon is not limited to online sales. Its cloud computing unit, Amazon Web Services, saw a 37% increase in revenue and 59% in operating profit, more than offsetting weakness elsewhere.

Every start-up today will have a different game plan. But cash generation should be at the heart of their survival kit.

Focus on the playing field

Thinking back to the dot-com era, perhaps the mistake many investors made was not that they believed the internet was going to change everything, but that they underestimated just how much the internet would become 20 years later.

In 1997, Amazon’s stock price was $1.70. It rose to US$107 in 1999 before losing 85% of its value two years later. Today, the shares are worth more than US$2,000 each. But for every Amazon, there were plenty of dot.com wrecks.

That said, no one could have predicted in the 2000s that the internet would become the backbone of our economy and our way of life, powering the way we work, buy and transact. Even though investors saw the potential in internet companies back then, it still took NASDAQ 15 years to regain its pre-dot-com glory.

For today’s tech entrepreneurs, patience and focus are key. Warren Buffett said games are won by players who focus on the playing field, not the scoreboard. That’s why moguls like Forrest Li losing billions are the norm.

Today’s disruptive companies need to hunker down and focus on generating cash rather than obsessing over their stock price. Without cash, they will not be able to survive and take advantage of the opportunities that new digital technologies could bring.

To note: An earlier version of this article appeared in Channel News Asia here.

How do you decide if a growth stock is worth your money? There’s no shortage of stock ideas today, but is one stock in particular right for you? Learn more in our latest FREE report, How to find the best US growth stocks for your portfolio. Click HERE to download the report for free now!

Follow us on Facebook and Telegram for the latest investment news and analysis!

Disclaimer: David Kuo does not hold any shares in any of the companies mentioned.

Comments are closed.