tech companies may lot going growth technology

techsuch May 9, 2021 0 Comments

6 Reasons This Tech Bubble Is BurstingSome of the hottest stocks on the market are technology stocks that have hadyears of potential growth brought forward by the COVID-19 pandemic. Zoom VideoCommunications (NASDAQ:ZM) became a household name, Shopify (NYSE:SHOP) hasexploded onto the scene, and names like Tesla (NASDAQ:TSLA), Square (NYSE:SQ),and Wayfair (NYSE:W) have all seen their stock prices at least double thisyear. And it’s partly because investors think the pandemic is accelerating theadoption of key technologies in society.Before you assume these companies will grow for the foreseeable future, it’sworth considering what the downside could be if life returns to a more normalstate in 2021. Will you still be excited to set up a Zoom happy hour withfriends and order a burger and fries from DoorDash before an at-home workouton your Peloton (NASDAQ:PTON) bike? Or are you going to cancel your Zoomsubscription and go to your local watering hole to hang out with friendsagain, just like you did in February?Image source: Getty Images.## Is this normal?There’s absolutely no question that technology has been used in new andinnovative ways over the last six months. And companies that were hoping togrow their adoption rate have seen usage explode. Food delivery services,video conferencing, and online retail are just a few of the tech companiesthat have grown more than expected in 2020.Using these new technologies has been great, but I want to be honest that I’msick of Zoom calls. And I don’t know anyone who wants to use Zoom more thanthey are today. Here are some reasons why the tech bubble may be on its way tobursting.## 1. The pandemic brought revenue forward that may not be sustainableThe pandemic likely accelerated some technology adoption that was cominganyway, like more online shopping and remote work. But some of that growth maynot be sustainable. Zoom is the perfect example here, showing an astounding355% increase in revenue to $663.5 million last quarter. But is thatsustainable after schools stop virtual classes, companies open offices, andbars and restaurants open to full capacity?Peloton is another company where I question its growth rate. In the fiscalthird quarter of 2020, it reported a 66% increase in revenue to $524.6 millionas total subscribers increased 64% to 176,600. But dig deeper, and you’ll seethat average monthly workouts per subscriber have jumped from 11.7 in thefirst fiscal quarter of the year to 17.7 last quarter. People are stuck homeworking out rather than going to the gym, but is that sustainable once gymsare fully open safely?These questions can be asked across the technology space. Sure, demand for acompany’s products may be up in 2020, but is it up because the fundamentaldemand is up, or is business doing well because of a very specific pandemic-driven increase in usage?## 2. GDP is fallingLet’s not forget that the underlying economic fundamentals aren’t particularlygood, despite the sharp rise in technology stocks. The stimulus money andextra unemployment benefits put a Band-Aid on what’s going to be a lot of painfor businesses and workers. When life returns to normal, there will still bethousands of restaurants out of business, tens of thousands of smallbusinesses shut down, and millions of people permanently out of work. That’snot necessarily an environment for growth, even in the tech world.US Monthly GDP data by YChartsI worry that we haven’t even seen the true economic effects of the pandemicnow that stimulus funds are ending. And we may be in for significantly lowereconomic activity in the second half of 2020 than we saw a year ago, whichisn’t good for any company.## 3. A lot of companies are going to finally throw in the towelSpeaking of businesses, a lot of smaller businesses have been skating by thelast six months as demand dropped. Restaurants are the most clearly affected,but dentists, salons, photographers, event centers, and many more are having arough year. And lots of companies will eventually throw in the towel.For companies like Square and Shopify, that’s a double-edged sword. On onehand, companies are trying their services as a way to stay afloat or adapttheir business models. But on the other hand, they’ll likely see lots of thesmall businesses they work with go out of business.The cascading effects of small businesses closing up shop will be felt acrossthe economy as well. Commercial real estate is already struggling in someplaces, and suppliers and employees will feel the pinch next. When smallbusinesses aren’t healthy, it’s tough to have a healthy economy, and I don’tsee a lot of positive signs in the next few quarters for shops that havestruggled during the pandemic.## 4. Tech stock multiples are out of controlThe market is currently pricing in a lot of growth for technology companies,and I pointed out above that that growth may not be sustainable. If techcompanies disappoint even a little, the hammer could come down hard.I mentioned that Zoom’s revenue growth may not be sustainable, but that’s justthe start. Is Tesla going to continue selling cars as fast as it can make themif millions of people are out of work? Is online furniture going to be a hotbusiness when the stimulus checks stop coming in and retail stores open? Isat-home fitness really going to replace the gym experience?PTON PS Ratio data by YChartsThe multiples you see above show that investors are counting on a lot ofgrowth in the future. And when investors get disappointed, the market cancrash fast.## 5. Someday, the easy money will endIf you read or listen to a lot of big investors, you’ll hear that the currentmarket is really fueled by the Federal Reserve. It’s flooding the system withmoney to keep interest rates extremely low, reducing the return on bonds, realestate, and savings. Where else is the money going to go other than the stockmarket?The Federal Reserve’s reaction to the pandemic may have been the right one,but it can’t keep money pouring into the economy forever without leading toinflation. Of course, some have been saying that for more than a decade and ithasn’t come to fruition yet, but when the Federal Reserve punch bowl ispulled, it may cause a collapse we rarely see in the market. And investorsdon’t know when the free money will run out.## 6. This wouldn’t be the first tech bubble to popIn the 1990s, there was a similar euphoria about tech stocks. It didn’t matterif a company made a profit or what price-to-sales multiples looked like –investors would buy anything. We may be seeing something similar this yearwith tech stocks, fueled by special purpose acquisition companies (SPACs)buying up anything tech-related.This bubble is very different from the 1990s because tech companies usuallygenerate revenue and some are even profitable. But valuations are still out ofcontrol, and I wouldn’t be surprised if a small disruption sends the entireindustry lower.## Tech stocks have run too far too fastTechnology companies are disrupting a lot of what we do in our lives andchanging how we work, communicate, and play. But that doesn’t mean that everytech stock will grow forever or deserves a huge price-to-sales ratio.I think the current bubble is starting to pop in tech stocks. Long-term, thisis an industry with a lot of potential. But shares have risen too high toofast, and as we saw in the early 2000s, the tech bubble will eventually pop.This article represents the opinion of the writer, who may disagree with the“official” recommendation position of a Motley Fool premium advisory service.We’re motley! Questioning an investing thesis — even one of our own — helpsus all think critically about investing and make decisions that help us becomesmarter, happier, and richer.

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