We have previously distinguished tech platform stocks based on whether they are social or utility ones — to provide better analytical clarity between the two. Very briefly, social platforms tend to have declining marginal costs and they see quick gains from the network effect, the combination of which turns strong sales growth into huge profits — and high valuations. However, these gains are not limitless, as was assumed, and at some point, will actually work against the platform as people do not want to be the same as everyone else. Hence, we see the number of Facebook users stagnating and even starting to decline. How and whether Meta Platforms (the parent of Facebook, Instagram and WhatsApp, among others) can reverse this trend remains to be seen.
The imminent end to the free flow of cheap and easily available capital will surely raise more questions about the valuations of high-growth tech stocks and, in particular, startups that embraced the “growth at all cost” strategy. As we wrote last week, many of these companies have been able to scale up rapidly, gaining market share from traditional players through heavy subsidies funded by cheap capital — but are now faced with increasing pressure to turn those sales into actual profits.
In fact, this is no different from what is required of any business — that there must be a viable business model. Rapid technological advancements may be transforming our way of life at an unprecedented speed and scope but at the end of the day, technology is — and will always be — just the enabler. Similarly, no matter how exciting the tech-driven stories, success still depends on the “boring” underlying fundamentals like operating margins.
