Endemic and Interest Rate Hikes... Big Tech Companies Shedding the 'Corona Bubble'

Big Tech Stocks and Earnings Decline
Impact of Endemic and Interest Rate Hikes

Big Tech Companies (Photo by Yonhap News)

[Asia Economy Intern Reporter Lee Seohee] The once booming IT industry is now slowing down. The special demand enjoyed during the COVID-19 pandemic has ended, and with the full-scale interest rate hikes underway, the industry appears to be entering a recession. As IT companies' earnings and stock prices plummet, investors' concerns have grown.

On the 15th, the Nasdaq index closed at 11,099.16, rebounding 270.81 points (2.50%) at the New York Stock Exchange (NYSE) in the United States. Although the Nasdaq index barely managed to rebound that day, the increase was limited compared to the 530.80-point (4.68%) plunge two days earlier. Recently, the Nasdaq index, which is tech-stock focused, has been on a downward trend. The S&P 500 technology sector is experiencing the same. Looking at the index fluctuations of the 11 sectors of the S&P 500 from the beginning of this year to the 14th, information technology (IT) companies have fallen 28.06% this year, ranking third highest in decline among the 11 sectors.

The reasons are interest rate hikes and poor performance of big tech companies. The U.S. Federal Reserve (Fed) decided on a 'giant step' (a 0.75 percentage point interest rate hike at once) at the Federal Open Market Committee (FOMC) meeting on the 14th and 15th. Fed Chair Jerome Powell said at a press conference that "continued rate hikes would be appropriate," and indicated that a 0.5% to 0.75% point increase could be possible at the next meeting. Further base rate hikes are expected going forward.

The high interest rate environment inevitably burdens IT companies. Many IT companies rely on investment funds or borrowings until new technologies establish themselves as new business models. If interest rates rise faster than expected, companies may struggle to attract investment or go bankrupt due to debts accumulated during the low-interest period. This is why the Fed's hawkish outlook (preference for monetary tightening) leads to stock price declines.

Additionally, the poor performance of the IT industry after the COVID boom also played a role. As the end of COVID-19 approaches, consumer spending has shifted back from online to offline, causing a sharp decline in users of big tech companies recently. Netflix lost more than 200,000 subscribers in the first quarter of this year compared to the last quarter, marking the first subscriber decrease since operating its online video platform. Apple's operating profit for the first quarter of this year is also expected to remain at $23.3 billion, down from $34.6 billion in the previous quarter.

The situation is no different for domestic IT companies. According to data analysis solution Mobile Index, the number of users of domestic delivery apps continues to decline. In the fourth week of May, the user numbers for the three major delivery apps (Baedal Minjok, Yogiyo, and Coupang Eats) decreased by 8.2%, 17.2%, and 25.2%, respectively, compared to the first week of March. The same applies to metaverse apps. Naver Zepeto, a metaverse platform, recorded a total usage time of 34,400 hours on Android users on March 19, which dropped to 26,600 hours on April 30, decreasing by nearly 10,000 hours in one month.

Investor concerns have also grown due to the consecutive declines in stock prices and earnings of big tech companies. A securities community user, Mr. A, wrote, "I currently hold Nasdaq tech stocks, but it seems much better not to be in Nasdaq," adding, "I'm feeling down as I have to pay taxes this month." On the other hand, user B said, "This crash is different from the IT crash in the 2000s," and added, "Although aftershocks from liquidity reduction will continue for a while, I believe the possibility of triggering credit risks like the Nasdaq market bubble collapse is low."

Meanwhile, the Bank of Korea is accelerating interest rate hikes in response to the sharp rise in inflation. Following a 0.25 percentage point increase in the base rate in August last year, the Bank of Korea raised rates three times in January (1% → 1.25%), April (1.25% → 1.5%), and May (1.5% → 1.75%). This is the first time in 15 years that the Bank of Korea has raised rates for two consecutive months since July and August 2007.

This content was produced with the assistance of AI translation services.