Tech’s Reckoning With Reality Is Still Half-Baked

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The market hasn’t been kind to tech companies that surrender to reality. It can be even worse for those who haven’t.

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Yet fund manager Kathy Wood argued in an installment of her webinar, “Into the Know,” that the problems facing both the world and the markets give technological innovation even more opportunities.

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Almost everyone in tech has suffered lately as investors suddenly shifted from price increases to profits and cash-flow generation at all costs. For example, shares of IAC are down 53% over the past 12 months, while Ms. Wood’s ARK Innovations exchange-traded fund is down 64%, according to FactSet.

The biggest stories in tech lately have been accounts. Netflix said last month that it would offer ads—something co-CEO Reed Hastings has long eschewed and even referred to as exploits. The once-aspiring Peloton Interactive ousted its founder, lowered the price of its hardware and even bundled that hardware into a new subscription tier in hopes of a more accessible future. This week snapchat parent, snap,

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has warned that online advertising growth is slowing even more than the market expected, sending social media stocks diving.

And, after being particularly big on the promise of automated home-flipping, or “iBuying,” online real-estate company Zillow Group left the business, with Chief Executive Officer Rich Barton calling it “too risky, too volatile”. said. Its earnings, with “little opportunity for return on equity”.

So much for the premium on innovation. Shares of these four companies are down about 75% on average over the past 12 months. So the market is not yet rewarding its turn towards realism. But companies are still dreaming of limitless growth and could set themselves up for an even greater failure.

In an email to employees earlier this month, Uber Technologies chief executive Dara Khosrowshahi acknowledged the market’s current shift away from growth, but he also talked about a desire to grow even faster in areas including food delivery. . On the company’s freight business, he complained that less than 10% of investors asked about it recently. “Freight needs to be scaled up even more so that investors can recognize its value and love it as much as I do,” Khosrowshahi wrote.

Opendoor, a pure iBuyer, hopes to become a “nationwide, all markets company”. As of its last earnings report, Opendoor was live in just 48 markets, which was believed to take 88% of the country. Opendoor did manage to make money in the first quarter — but that was in an exceptionally strong housing market with revenue up 590%, something that’s unlikely to last long.

Incredibly, Ms. Wood’s ARK Innovation ETF has seen net inflows of nearly $1.4 billion this year alone, according to FactSet.

No matter what, it took 15 years for the Nasdaq to regain its peak since the early 2000s. Ms. Wood says the time horizon for her investment is five years. His research claims that today’s market conditions are nothing like a tech and telecommunications bubble as his companies are still projecting sales growth, while the failed “seeds” of the early 2000s have shrunk. Posted revenue. Of course, everything can be made to look benign when you compare the present with what was probably the most bullish market period ever.

Ms. Wood wrote of the market today, “The strongest bull markets tend to climb a wall of worry … This time, the wall of worry has risen to enormous heights.” Meanwhile, his fund is predicting a return of about 7x over the next four years for his position in electric-vehicle maker Tesla. It sees augmented reality expected to grow 1,000-fold in market capitalization by 2030. And more recently he said that it will see the price of bitcoin rising to $1 million in the next four to eight years.

A lot can happen in the meantime. Elon Musk’s $54.20 per share offer for Twitter already looks like his example of irrational enthusiasm, just a month after it was made, Twitter’s stock is now trading 34% lower than his bid. It seems that it is dawning even for Mr. Musk that he has overestimated a company with great potential, but is reeling from challenges today.

Bullish tech investors still need to take a good look at that black mirror.

Write Laura Forman at [email protected]

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