Revenge of reality: how technology was discounted in 2022

There is an ironic symbolism in the news that Bernard Arnault, the buttoned-up French boss of LVMH and purveyor of fancy frocks, handbags and champagne to the comfortable classes, has overtaken the futuristic rocket man Elon Musk as the world’s richest billionaire.

One of the themes of 2022 is how heavily the technological future has been discounted by investors. The more conventional industries of the past, such as luxury, energy and defence, have roared back into fashion. Call it the revenge of reality, and not of the virtual kind.

The mood swing has been extraordinary. At the end of last year, one rash fool in the Financial Times predicted that shares in Tesla, the electric car company run by Musk, would keep going up in 2022. Although the stock was madly overvalued by any traditional financial metric, Tesla fans still enthused about them as a kind of variant non-fungible token: a non-financial ticket to the future. But I was not the only one to be surprised by the suddenness and severity of the turnround. The tech-heavy Nasdaq index has fallen 32 per cent this year. Tesla’s shares are down 66 per cent.

Indeed, one of the year’s most profitable trades has been to short the technological future. Shares in the Ark Innovation ETF, run by the high-profile, techno-optimist fund manager Cathie Wood who invested heavily in racy tech stocks such as Tesla, Zoom and Coinbase, are currently trading at just 21 per cent of their peak value. Those shorting the Ark’s family of funds this year have made a 110 per cent return, according to S3 Partners. “We have just come off a borderline insanity environment,” one investor told the FT this week.

A surge in inflation followed by rising interest rates triggered the stock market reversal. As the most overbought sector, tech stocks were particularly exposed to the turn in the cycle. It may have been true that the Covid pandemic accelerated a massive shift to digital as we all lived more of our lives online. But many tech companies, and investors, overestimated the depth and duration of the trend. Even the giants of Silicon Valley are laying off workers as they retrench.

The big question is whether investors were premature and overpaid in their enthusiasm for tech — or were just plain wrong. Did they buy into the future too soon, or did they buy into a delusion? The latter argument has been strongly made by the tech historian Jeffrey Funk, who contrasts the bursting of the dot.com bubble in 2000 with what is happening today.

Back then, the dot.com bubble financed the development of ecommerce, digital media and enterprise software, which have all had lasting economic value. By contrast, Funk argues, it is hard to see comparable benefits in the latest crop of tech companies investing in the metaverse, web3 and crypto. “When the air goes out of this bubble, we very well may be left with hardly anything of value at all,” he writes in an American Affairs article co-authored with Lee Vinsel and Patrick McConnell.

It is true that many tech start-ups in the recent upswing, particularly in fintech, ride-hailing and speedy food delivery, were built on streams of cheap, and seemingly endless, capital. Now that money costs something, they are struggling to sustain lossmaking business models. Much of the excitement about crypto also looks absurd following the implosion of the crypto exchange FTX amid accusations of fraud.

But the public tech sector still boasts several dominant, and highly profitable, companies, including Apple, Microsoft and Alphabet. Parts of the tech market, including semiconductors, cloud computing and gaming, also continue to boast of great growth prospects. And just as one tech bubble deflates, another is already inflating.

Captivated by the capabilities of content-generation models, such as OpenAI’s ChatGPT for text and Dall-E for images, venture capital investors have been pouring money into generative artificial intelligence companies. The venture capital firm Antler has already identified more than 160 start-ups in this field, with four of them emerging as unicorns, valued at more than $1bn, this year alone.

The theory is that the marginal cost of creating text, code and images will fall towards zero, boosting the productivity of knowledge workers in most creative industries. “Generative AI has the potential to generate trillions of dollars of economic value,” gushes Sequoia Capital in a recent report.

Given my own record in the predictions business, I am not making any forecasts other than to say: a lot of money will be made — and lost — in generative AI.

john.thornhill@ft.com