A trajectory accident or a periodic reversal? After two years of exceptional prosperity, particularly due to the pandemic and the growing reliance on digital technology that has caused it, American technology is now facing an amazing setback.
On Wall Street, industrial stock prices are dropping one by one. On May 9, the Nasdaq closed at its lowest level since November 2020, and Nearly half of the companies listed there have lost 50% of their value. Netflix, Meta, and Amazon have all seen their shares drop more than 30% since the beginning of the year. The S&P 500 is down 13%.
The situation is not much brighter in the cryptocurrency market, where $200 billion evaporated on Wednesday, May 11 alone.
Results at half mast in the first quarter
This poor performance comes on the heels of disappointing results announced by several big technology players in the first quarter of 2022. Netflix saw its user base decline for the first time in ten years, while Alphabet, Meta and Amazon reported lower turnover numbers than they had expected. Wall Street . Only Apple stands out, exceeding investor expectations despite problems in its value chain.
Smaller but promising tech players are facing setbacks in the stock market. Such is the case of Palantir, the big data processing company created by Peter Thiel, whose stock price has lost more than 20% of its value while increasing sales less than in previous quarters. Or even Snowflake, whose stock price is down 25% in April.
Many companies have already responded by pressing the brake pedal. Uber has promised to cut spending, including slowing hiring, slashing marketing budgets, and limiting driver bonuses. Meanwhile, Facebook announced a total hiring freeze until further notice, while brokerage app RobinHood plans to lay off 9% of its workforce. Thracio, an Amazon aggregator valued at more than five billion dollars, is in the meantime laying off a fifth of its employees and changing its CEO.
On the investor side, the atmosphere is also halfway there. ” In Silicon Valley, investor sentiment is at its lowest since the dotcom bubble burst David Sacks, a San Francisco-based venture capitalist and former PayPal CEO, recently tweeted.
Back to normal?
The pandemic has been an exceptionally opportune time for the new tech sector, as customers, deprived of entertainment, have scrambled to video-on-demand and meal-delivery services, while telecommuting companies have begun searching for digital tools to enable remote collaboration. In 2020, Meta, Amazon, Alphabet, Apple and Microsoft together generated $1.1 trillion in revenue, up 20% from 2019. And their profits are up 24%. ” The market capitalization of these companies has reached up to 20 times their turnover, compared to about six times in normal times ‘,” notes Will Price, founder of venture fund Next Frontier Capital.
Thus, the current slowdown is a partial sign of a return to normal, as restrictions imposed during the outbreak of the epidemic and reliance on digital products are fading at the same time, returning technology to the place it occupied before the pandemic. ” Not all of these companies are poorly managed, in fact, they are overrated. Summarizes Mark Stoekel, CEO of Adams Funds investment fund. ” The enthusiasm that arose around them was so strong during the pandemic that the public was willing to buy their shares well above their real value. Now, with growth slowing due to a combination of geopolitical factors, investors are reducing risk and paying more attention to valuations. »
Explosive geopolitical context
Because in addition to a simple return to normal, a host of conditions are already affecting the economy, especially digital. The shortage of semiconductors, which is here to stay, strict Chinese containment due to the zero-Covid strategy that the government refuses to give up, and the war in Ukraine, which poses problems with energy and raw materials supplies, leading to major disruptions in the value chain for tech companies.
The return of inflation poses a double problem for them.
” On the other hand, the economy slows down and the expected income decreases. On the other hand, there is a talent shortage which makes hiring very difficult, forcing digital companies to offer ever higher salaries to hire the best, while existing staff must be increased. Inflation… These companies are caught in the crossfire », will price analytics.
And to add:
” Against this background, investors are taking a step back and trying to assess how long the current economic downturn may last. »
the cloud resists
This question is really on everyone’s lips. Are we seeing the start of a period of lean beef for the US tech industry, temporarily slowing down in order to get off to a better start in the coming months? ” No doubt the second quarter results will be eagerly awaited, and will go a long way to determining whether or not the first is an anomaly. Will Price says.
However, some indicators remain in the green and allow us to bet on the resilience of the sector. The labor market remains buoyant, with the US economy creating 428,000 new jobs in April, a figure above the 400,000 mark for the 12th consecutive month. The unemployment rate is only 3.6%: so the US economy is experiencing full employment.
Certain parts of the digital economy also had a stellar first quarter. This is particularly the case for the cloud, a market whose growth is currently showing no signs of slowing. AWS, the market leader, reported net sales of $18.44 billion and operating income of $6.5 billion this quarter, compared to $17.8 billion and $5.3 billion, respectively, in the previous quarter. Microsoft Azure, which ranks second in the global cloud, has seen its turnover grow 32% in one year, and the number of contracts over $100 million the company has signed has doubled. Google Cloud also does a very honorable job, with a turnover of 5.54 billion versus 4 billion last year in the same period.
” Just as investors during the pandemic are betting on companies likely to do well (Zoom, Peloton, etc.), they will now focus on companies likely to benefit from a slowing economy. However, as companies look to lower their costs, cloud players have every chance of doing a good job. This is also the case for companies that offer automation in markets that need a workforce: robots, autonomous trucks… », will price analytics.
The end of the growth strategy at what cost?
Since they invest in all directions, rely on the money that investors pay, and rely on a solid growth strategy to offset losses in the medium term, unicorns are more vulnerable to this type of economic downturn than Gafam. Across the Atlantic, some commentators are beginning to talk about ” zombie unicorns They argue that investors may have to help these young people avoid bankruptcy.
For Mark Stoeckl, The tech giants still enjoy high revenues and profits, as well as free cash flow, and therefore face lower risks. The recent drop in its stock price makes it more attractive to investors: at the current price, it’s a bargain. Rhino startups will be hit hard by rising interest rates and investor caution. This is especially true for companies like Lyft and Uber who have yet to come up with a sustainable business model. “.
According to Will Price, a growth strategy at all costs, which allows tech startups to please investors without worrying about making a profit as long as they continue to grow, could be put on hold for a while. ” Over the next 18-24 months, investors are likely to appreciate the ability to generate more liquidity and less rapid growth. »