Revenge of Reality: How Technology Was Discounted in 2022
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It is ironic symbolism in the news that Bernard Arnault, the buttoned-up French boss of LVMH and purveyor of chic dresses, handbags and champagne to the easy-going classes, has overtaken futuristic rocketman Elon Musk as the world’s richest billionaire.
One of the themes of 2022 is how much the tech future has been priced in by investors. The more conventional industries of the past, such as luxury, energy, and defense, are back in vogue. Call it the revenge of reality and not virtual.
The mood swing was extraordinary. Late last year, a hasty dope in the Financial Times predicted that shares of Tesla, the Musk-led electric car company, would continue to rise in 2022. Though the stock was insanely overvalued by all traditional financial metrics, Tesla fans still raved about them as a variant of non-fungible tokens of sorts: a non-financial ticket to the future. But I wasn’t the only one surprised by the suddenness and severity of the turn. The tech-heavy Nasdaq index is down 32 percent this year. Tesla shares are down 66 percent.
In fact, one of the most profitable trades of the year was to short the technological future. Shares in the Ark Innovation ETF, run by high-profile, techno-optimistic fund manager Cathie Wood, who has invested heavily in fast-paced tech stocks like Tesla, Zoom and Coinbase, are currently trading at just 21 percent of their peak. Those who shorted Ark’s family of funds this year have returned 110 percent, according to S3 Partners. “We just got out of a borderline insanity environment,” an investor told the FT this week.
A rise in inflation, followed by rising interest rates, triggered the trend reversal on the stock markets. As the most overbought sector, technology stocks were particularly hard hit by the turnaround in the cycle. It may have been true that the Covid pandemic has accelerated a massive digital shift as we have all spent more of our lives online. But many tech companies and investors have overestimated the depth and duration of the trend. Even the giants of Silicon Valley are laying off workers as they downsize.
The big question is whether investors were premature and overpaid in their enthusiasm for technology — or just plain wrong. Have they believed in the future too soon, or have they succumbed to a delusion? The latter argument was strongly advanced by tech historian Jeffrey Funk, who contrasts the bursting of the dot.com bubble in 2000 with today’s events.
Back then, the dot.com bubble funded the development of e-commerce, digital media, and enterprise software, all of which had enduring economic value. In contrast, Funk argues, it’s hard to see comparable benefits in the latest generation of tech companies investing in Metaverse, Web3, and crypto. “When the air in this bubble goes out, we may not have anything of value left,” he writes in an American Affairs article co-authored with Lee Vinsel and Patrick McConnell.
It’s true that many tech startups in the recent upswing, particularly in fintech, ride-hailing and fast food delivery, have been built on flows of cheap and seemingly endless capital. Now that money costs anything, they struggle to sustain loss-making business models. Much of the fuss surrounding crypto seems absurd even after crypto exchange FTX imploded amid allegations of fraud.
But the public tech sector still boasts several dominant and highly profitable companies, including Apple, Microsoft, and Alphabet. Parts of the tech market, including semiconductors, cloud computing, and gaming, also continue to offer great growth prospects. And while one technology bubble is collapsing, another is already inflating.
Fascinated by the capabilities of content generation models like OpenAI’s ChatGPT for text and Dall-E for images, venture capitalists have poured money into generative artificial intelligence companies. Venture capital firm Antler has already identified more than 160 startups in this space, four of which are emerging as unicorns valued at more than $1 billion this year alone.
The theory states that the marginal cost of creating text, code, and images will drop toward zero, increasing the productivity of knowledge workers in most creative industries. “Generative AI has the potential to generate trillions of dollars in economic value,” enthuses Sequoia Capital in a recent report.
Given my own track record in the prediction business, I’m not making any predictions other than to say: there’s a lot of money being made – and lost – in generative AI.
john.thornhill@ft.com
