IT meltdown: A sign of dotcom bust?

Global stock markets are roiled by the impending interest rate hikes by the US Federal Reserve. Given the Covid pandemic is showing signs of fading, the US central bank has already indicated withdrawing the stimulus.

As the end to the easy money regime is near, both the developed and the emerging markets are showing steep fall in the last one week. Notably, stock prices have seen a quite a bit of run since the start of pandemic. Especially, technology companies have attracted many investors on the back of rising demand for tech-led interventions. This has led to expensive valuation of technology stocks. Under this umbrella, a host of companies including IT services firms, technology product giants, internet startups have seen their price to earnings ratio (PE) getting stretched. So, as the market correction gathers pace, technology stocks across the world is witnessing a sell off.

Nasdaq 100, the American stock exchange on which most technology companies are listed, was down by almost 12 per cent in January. It shed 7.5 per cent last week alone. All big names got hammered in recent days. Shares of streaming giant Netflix dragged down the index, plunging 22 per cent last Friday after the company's fourth-quarter earnings report showed a slowdown in subscriber growth. Similarly, shares of Disney, Tesla and Amazon had lost more than 5 per cent during this period. Most new age internet startups listed on Nasdaq had also seen drop in their valuation.

Taking cues from American exchanges, Indian bourses have also fallen in recent days. Most technology stocks have seen deep correction. Large IT services firms, which are global giants, had seen their share value tumbling last week and on this Monday. Tata Consultancy Services (TCS), Infosys, Wipro, HCL Technologies- all four large IT firms- have seen their share prices correcting on Monday mayhem.

A deep correction has happened in the mid-sized IT companies' shares where valuations have been expensive. For instance, Mindtree share prices have corrected by 11 per cent in last five days. Share prices of L&T Technology Services corrected by 10 per cent, while another mid-tier company Coforge's share price corrected by more than 10 per cent during this period. Not only IT firms, but a host of recently listed new age internet startups like Zomato, Nazara Technologies, Paytm, Policybazaar, MapmyIndia, Cartrade Tech and many more have seen their share prices correcting during this period.

Such a fall has reminded investors of dotcom bust of late 1990s. Whether this is a dotcom bust or not is debatable, but it has eerie similarities with that crash. Interestingly, a bull run in market can't continue beyond a point and a correction in valuation is considered healthy.

Moreover, the world is a lot more dependent on tech-led products and services than it was two decades ago. In an app-heavy environment, we are dependent on tech companies for all our day-to-day needs today. And this reliance seems irreversible. So, correction in share prices changes the valuation for a brief period but the fundamentals of these companies remain robust.