the bigger they are, the harder they fall
while not completely unexpected, the pace of the rapid downturn that the markets have taken may have come as a shock to scores of new investors. for many of them, having entered in the surging ‘bull’ rally following the major dip when the pandemic initially broke out, this is possibly their first taste of ‘bears’ taking control of the market. further, many of them might be wondering why some of the most popular or exciting names on the market have taken a bigger beating than others that are ‘boring’ or not so often in the news.
here are some examples that shed light on the situation.
January 24 was brutal for many Indian technology stocks, with investors exiting some big name 2021-debutants by the droves. Zomato almost hit the lower circuit in intra-day trading after seeing its share price fall 19% to Rs 91.7/share, having already slid 30% the previous week. meanwhile Nykaa saw its stock 9% in the red at Rs 1,817.5/share and is down 31% from its high of November 2021. PolicyBazaar saw a 5% drop on the day and sits around 45% below its peak price. Paytm continued its downward trend, losing 4% on the day and putting IPO-holders at over a 60% discount to their issue price.
the reason behind all of them is a rather simple one, overvaluation. typically, valuation is based on a company’s profits and a certain multiple applied to them for future growth. however, all the companies mentioned above are either not profitable or have only just begun reporting growth in recent quarters, boosted by the pandemic-driven uptake of technology stocks. with the initial quarterly reports of tech companies in the US showing that growth slowing down, investors are jumping ship before similar news is confirmed in their holdings.
further, the first of the US Federal Reserve’s three projected rate hikes for 2022 may be just around the corner. climbing bond rates are usually bad news for growth stocks as investors stop chasing their potential future earnings growth in favour of more stable assets.
electric vehicles is another sector that has taken a major hit across the board, for similar reasons. On January 24, Amazon and Ford-backed Rivian briefly fell below its IPO price of $60/share for the first time since making its market debut in November. Chinese automaker Nio saw its share price drop 9.1%. perhaps their decline was understandable given that they’re yet to be profitable and their delivery figures significantly lag the valuations they had run up in the markets, somewhat similar to the tech stocks mentioned above.
however, the hand of the Fed measures was seen in the fact that the largest player in the sector, Tesla, also took a hit of as much as 10% during the day. this meant its shares had lost 24% of their value since the turn of the year despite reporting a record number of deliveries.
in an upward or downward market, it is usually advisable to invest with the trend. this may be advice that new investors in particular take on board, as the bulls retire for some rest and the bears come out for their turn in the sun.