For technology firms, 2022 has been a torrid year. Soaring inflation has squeezed the future earnings value of speculative companies. Consumers have tightened their purse strings. The war in Ukraine and souring relations between China and the West have added to the uncertainty. As a result, the value of high-growth firms that remained unprofitable has plummeted.
That stands in stark contrast to 2021. Back then, the pandemic darlings that aided digital life benefited from national lockdowns and the accompanying shift to more digital services. Our “lockdown lunacy index” (see chart) measures the stockmarket value of five such firms, giving each of them equal weight: Netflix, a streaming service; Peloton, a maker of internet-connected exercise bikes; Robinhood, a stock-trading app; Shopify, an e-commerce platform; and Zoom, a videoconferencing firm. The portfolio’s value increased by 320% between the start of the pandemic and its peak in August 2021. In the same period the tech-heavy Nasdaq rose by just 88%.
This year tech firms have had to cut back. One approach has been to stop side projects. Snap, a social-media firm, binned its selfie drone project. The same fate befell a cryptocurrency project at Meta, Facebook’s parent company, and Stadia, Google’s game-streaming service. Another has been to ditch staff (see chart 2). Crunchbase, a data provider, estimates that more than 50,000 American tech personnel have been laid off so far in 2022. Though that is only around 1% of those employed in the technology sector, some big firms have made deep cuts. In November Meta fired 11,000 people, or 13% of its staff; Stripe, a digital-payments service, cut 14% of its workforce. Further belt-tightening may be required, as the tech crunch continues. Who will come out on top?
Three factors are worth considering: geography, sector and size. The value of tech firms has tumbled regardless of geographic location, as investors in the various markets hit by inflation have reassessed future cashflows. On top of that, even non-Western tech firms earn a significant chunk of their revenue in America or Europe. Regions, therefore, will probably matter less than sectors. Consumer-facing tech firms were the first to see a decline in sales in 2022. But makers of business software, such as Adobe and Salesforce, should fare better. Enterprise customers tend to sign up to long-term contracts, which are less sensitive to changing consumer demands. The growth of the cloud-computing arms of tech giants, including Amazon, Google and Microsoft, have shown some signs of slowing, but are likely to hold up well as software, services and data continue to move online.
As for size, larger firms tend to be more resilient in a downturn, partly because they hold plenty of cash. That helps them hire and retain the best talent. It also enables them to snap up small firms at bargain prices. After the dotcom bust in 2001 and the global financial crisis of 2007-09, the number of tech acquisitions quickly returned to its pre-meltdown level, but the average price of deals fell. Tech’s big shake-up, in other words, may help the industry’s giants grow even bigger in 2023.
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