The ‘tech-cession’ is a return to reality
Surveying the tech landscape this week, your humble columnist was faced with a problem: there was too much to write about. Tickling my particular fancy is news of the looming death of the fax machine (it won’t die, though; telex and even radiotelex are still around). Another option was the Web Summit, though frankly it generates plenty of news and even more comment without me hitching my wagon to it.
The obvious thing to have done would have been to write about Elon Musk’s accidental acquisition of Twitter, possibly the first time ‘shitposting’ has resulted in a $44 billion (approx. €44.5 billion) bill. While I do have things to say, and may yet say, however, this week is not the right time. Another time.
I did decide to write about dead money, nonetheless.
Instead of wittering about Twitter, I have decided to go meta, by which I only incidentally mean Mark Zuckerberg’s plans for connected virtual reality. Let’s take a look at the tech industry as a whole.
The flight of Icarus
While Mr Musk was closing the deal to acquire the unprofitable Twitter, that other social media stalwart, Facebook, saw a shocking collapse in the share price of its parent company Meta Networks. Down over 73% this year, Meta lost a quarter of its value in just one day last week.
The fall was precipitous, but it was not an isolated incident. In truth, investors collectively seemed to mis-read Meta’s numbers, coming to the incorrect conclusion that the company was spending billions on its Reality Labs division alone. However, while Meta’s shares hit the deck, plenty of other tech companies have been having a bad week or two in the markets.
AMD reported disappointing numbers and is now down over 89% since January. Shares of Microsoft, truly a cash generating behemoth, are down, too, a whopping 34%. Intel, as we know, has been sliding all year, now down 48%.
Apple continues to defy gravity for the moment, as does IBM – though the latter is certainly not at all-time highs.
Collections of businesses tell the story without the distortion caused by outliers at either end of the spectrum. The Nasdaq Composite index is not a perfect avatar for information technology, but it is composed largely of technology companies. It has fallen 34% since January.
Seemingly, the deeper any collection of shares is into tech, the deeper the trench they have fallen into. High tech but speculative investment fund Ark Innovation is down over 61% year-to-date. The similar, but more strictly governed, Scottish Mortgage Investment Trust is down 43% in the same period.
As I have been at pains to point out several times in this column, a company’s share price is not a direct indicator of its health. Plenty of unprofitable businesses have seen their shares rocket in advance of a moonshot that is never pulled off, while others remain stuck in the doldrums despite grinding out consistent profits for decades. They do give us some insight, however, into sentiment.
Share prices are, as they say, ‘forward looking indicators’, meaning they are based not only on past performance (though this is a factor, of course) so much as on analysts’ and investors’ best guess of how a company will perform in the 12 months to come.
Their message about the tech sector is loud and clear: you’ve had your fun, but the party is now over.
The tech industry is not going to fall apart, but two important factors are at play: an artificial boost created by pandemic-era decisions that favoured businesses in the sector has come to an end. At the same time, the era of stimulus via cheap money has also ended, with inflation driving a tightening of fiscal regimes across much of the world.
In a world of higher interest rates investment will flood out of the stock market and into bonds and savings instruments, and if we really are in for a serious recession then spending, consumer and business alike, will drop, piling on even more pressure.
A recession is obviously not to be welcomed even if a little schadenfreude is understandable when it comes to slaps being liberally distributed to companies that attempted to package marketing, taxi dispatching and even squeezing mulched fruit into juice as ‘technology’. Even some companies that have actually innovated, occasionally even for the good, have had it too easy as, given zero and even negative interest rates, money had nowhere else to go.
Assuming we can avoid a major recession, a rebalancing of the economy to think beyond apps would be welcome.
More than a few tech companies, like Icarus, flew too close to the sun. Unlike Icarus, they will not fall into the sea, even if one or two deserve to, but being stuck with valuations a little closer to reality will be good both for the businesses and for society itself, which has frankly been bent out of shape by the sector’s unreasonable expectations and endless, unfulfilled promises of a bright new dawn.