One thing to remember about bubbles: the disconnect between stock-market value and any plausible valuation can happen in both directions. After the last few crashes, and to a larger degree after the Wall Street Crash, a lot of companies were priced at far less than a rational assessment of their value.
The richest people in the world made a killing in 2020 when every stock was massively depressed. They went on a buying spree (so did I, but with a tiny fraction of a percent of the available cash). A couple of years later, pretty much anything you bought then had at least doubled in value, if not gone up by a factor of five or ten. Even before the current bubble started inflating, getting back to vaguely plausible valuations made money for anyone with liquid capital when the recovery hit.
The 2020 dip was brief because governments threw money at propping up economies and because the markets decided that the availability of vaccines meant everything was back to normal. Most previous stock-market hits have taken far longer to recover. MSFT was basically flat for a decade after the .com crash, for example. It’s an opportunity for private equity to jump in and asset strip the companies that are undervalued, which will have a big knock-on effect across the entire economy.
That means three things:
Companies affected will not be able to raise money by issuing stock as easily. When your stock price is climbing every year, you can make it climb a bit more slowly by issuing stock and that gives you free cash to spend. Big tech companies have been doing this for decades, often buying up potential competitors by simply issuing more stock to make the purchase price (and often buying with the stock, which avoids it hitting the market: if the stock price is going up, many of the people who are given it won’t sell immediately).
Companies that have historically paid a lot of their total compensation in stock will have to pay more cash to remain competitive. That may significantly increase the cost of payroll. Keeping paying in stock would require issuing more (pushes the price down) and, if the price is not going up, more employees will sell it as soon as they get it and that further increases the rate at which the price drops.
Finally, all of those loans that they’ve taken out are likely to start to bite. They can’t pay interest by issuing stock, so it becomes drag on revenue. That leaves them more vulnerable to competitors. Normally, economies of scale favour existing players, but having to skim loan interest off every sale cuts their margins and makes it harder to lower margins selectively to make competitors unprofitable.
And some of these loans are going to be expensive. I originally bought NVIDIA shares because I thought, with their expertise and some tactical leadership, they could be as big as Intel in the mobile and server markets. Instead, they went all-in on the bubble. Their market cap is now around 10x Intel’s. A correction that assumes that the6 can still grow, just not like a bubble, might bring them down to Intel’s price. That would leave them servicing loans of about the total value of the company. But the market value is based on predictions of growth and also on completely irrational factors. It’s possible that they could drop to 5% of their current value (which is still more than their pre-bubble value!). And that would make it basically impossible for them to borrow more (would you lend money to someone whose outstanding loans were double their asset value?).
