Why are technology stocks taking such a beating?

29 Dec 2022 , 02:56 PM

Technology stocks in most equity markets are taking a beating. Take the case of India first. Till 29^th December, the stock of Infosys is down year-to-date by 20.09%. Stock of TCS is down by 14.71%. Stock of Wipro is down by 45.98%. In this period, Nifty 50 has gone up by 2.61%. BSE Sensex is up by 2.71%.

Next take the case of technology stocks in US equity markets. Till 28^th December, 2022, Apple’s stock price is down year-to-date by 30.75%. Alphabet’s share price is down by 40.67%. Meta’s share price is down by a whopping 65.85%. S&P 500 index is down by 21.13% in this period. So technology stocks there too have underperformed the benchmark index by a wide margin.

One reason for the hammering that technology stocks are taking is because of the realization that they have become overvalued. Covid lockdowns made many investors believe that technology stocks are immune to the disruptions caused by lockdowns. The assumption was that demand for digitization will go up because of the lockdowns. People will be online more. All these factors will contribute to significant growth in the revenues and profits of technology companies in the foreseeable future.  This resulted in a strong rally in these stocks in 2020 and 2021. 

These calculations were alright except that they missed one crucial thing. Technology companies such as software companies are dependent on the fortune of their customer companies too. Take the case of an Indian IT company that provides software services to an airline company. Now if the airline company is not performing well, then it is going to cut down its budget of software services too. With lesser number of passengers to fly, its need for software services will also go down. This in turn will adversely impact the revenues and profits of the Indian IT company that is providing those services.

2022 dawned this realization on investors. That technology companies are not immune to the macroeconomic conditions around them. A global economic recession is going to hurt technology companies too. HP has already reported a record decline in its PC sales. In the September quarter, Alphabet saw the slowest revenue growth in 10 years. This realization that technology companies are as much linked to the economy as any other company, suddenly made these stocks look expensive at their prevailing valuations. This in turn has resulted in a broader sell-off. This caused the beating that technology stocks have taken this year.