Crypto and tech stocks are crashing. What this means for your investments – National
At the start of the COVID-19 pandemic, tech rising star Shopify became Canada’s most valuable company, beating established player Royal Bank of Canada for the top spot.
But over the past six months, shares of the Ottawa-based e-commerce giant have lost nearly 80% of their value on the Toronto Stock Exchange.
So what was wrong?
The company said last week it was continuing to grow revenue, but the growth was the slowest in any quarter since its 2015 IPO. Its earnings also beat analysts’ expectations. On the same day, the company announced the largest acquisition in its history, a $2.1 billion purchase of a logistics company, as it plans to expand its distribution network.
“We see the current market landscape unwilling to reward high-growth companies like Shopify that seek to sacrifice all profits at the expense of growth,” CFRA analyst Angelo Zino said last week.
Shopify is not alone.
Tech giants including Netflix and Facebook parent Meta — companies that, like Shopify, have seen massive gains during the pandemic — have seen their valuations plummet since the start of the year.
The tech-heavy Nasdaq composite’s 2022 loss of 25.7% so far is much larger than that of other indexes.
It’s not just that companies themselves are seeing obstacles in the road, it’s that the market itself has fundamentally changed, says Derek Dedman, vice president and portfolio manager at WDS Investment Management in Ottawa.
Here’s what some analysts say is driving the tech crisis.
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Inflation is at its highest level in decades in Canada and most other parts of the world, and central banks are broadly entering an aggressive cycle of interest rate hikes.
Market watchers fear a looming recession, Dedman says, which is driving investors away from so-called “growth stocks,” like higher-valued tech companies.
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These stocks are the ones that tend to pull back “the furthest and fastest when you know what’s hitting the fan,” he told Global News.
But selling technology doesn’t necessarily reflect whether a company is good or bad, and Shopify is a “great example,” Dedman says.
In November, when the company was trading at all-time highs of more than $2,200 per share on the TSX, the market was “pricing to perfection,” he says.
Today’s decline isn’t necessarily a reflection of changing fundamentals for Shopify, but an acknowledgment that the market won’t continue to grow the same way it did during the pandemic, when interest rates were low and online commerce was booming.
“Once a stock is priced to perfection like that, any kind of glitch along the way, any sort of drop in earnings, or any tailwind that turns into a headwind…will revalue the stock,” says he.
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“So it’s not that these companies suddenly become bad companies. It’s more a matter of waiting.
Cryptocurrencies and other digital assets are also losing value rapidly lately. Bitcoin, for example, has lost more than half of its value since its November highs.
Dedman says cryptocurrencies can be similar to tech stocks in that their value is derived more from expectations than underlying fundamentals.
“Once something skyrockets, it has a kind of further drop to hit when times change,” he says.
Some observers in the crypto space are undeterred by Bitcoin’s recent slump and have encouraged others to “buy the dip” – recouping an asset when it drops in hopes that it will rally back to previous highs.
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But others say the crypto market, which has seen strong growth during the pandemic, has yet to be fully tested by a rising rate environment.
“It’s not the first time we’ve hit this level, and the risk-reward to pick up Bitcoin here has been very good over the past year, but we’re seeing a different macro backdrop,” said Matt Dibb, COO of Stack Funds, a Singapore-based crypto platform, in an interview with Reuters.
However, bitcoin and other crypto assets following the trend of traditional markets may not be the worst thing for product longevity.
“From my perspective, two-way price action and occasional washouts are healthy for markets, including crypto,” said Brandon Neal, COO of Euler, a project that enables lending and lending. borrowing crypto assets.
“We’ve never seen crypto in a recession, and everyone’s guessing what’s going to happen,” he added.
What should I do with my wallet?
The market turmoil so far in 2022 could be off-putting to some investors who jumped into stocks during the pandemic, when rates were at their lowest and high valuations were all the rage.
A note from Morgan Stanley to clients this week suggested that retail traders – direct investors who buy individual stocks or funds rather than working with portfolio managers – have largely seen their gains wiped out since January 2020, according to a Bloomberg article.
Dedman says it’s entirely possible that many investors who haven’t been trading in a rising rate environment are getting a ‘red flag’ that the market has reached the ‘end of easy money’ .
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“I think for a typical retail investor, it’s a tougher time,” he says.
“Sometimes traders trade more on momentum than on the actual fundamentals of the underlying company. And ultimately the fundamentals have to somehow catch up with the valuation.
While Dedman says some stocks tend to perform better when rates are high — commodities and consumer staples, for example — it’s rarely a good idea to make big changes to your portfolio during downturns. low market periods.
Investing is a long-term game and markets are cyclical. If your losses are a bit too high for your risk tolerance and you need to reevaluate, Dedman recommends speaking with an advisor after the current lows pass to get a combination that better suits your financial situation.
“One of the most dangerous phrases in investing is ‘this time it’s different’. … We’ve been here before. We’ve been through these times before,” he says.
“When you’re in the heat of the moment, it’s kind of the worst time to make changes.”
– with files from Reuters, Associated Press
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