How tech’s defiance of economic gravity came to an abrupt end

The year 2022 went down as one of the worst years for the S&P500, the bellweather index for the American stockmarket. A large part of the fall was thanks to the big tumble big tech companies took after a stellar run over the recent years.

“America’s five largest technology companies—Apple, Microsoft, Alphabet, Amazon and Meta—saw their revenues and profits grow at five times the rate of American gdp in the decade to 2021. Tech’s ability to thrive as others struggled seemed to be confirmed during covid-19 lockdowns, when firms in the Valley posted record earnings even as much of the economy crumpled.”

But 2022 put the brakes on this fabulous run with the big 5 losing a staggering $3trn in market cap – that’s almost the entire market cap of Indian listed companies. So, what killed the party?

“One is that after years of growth, digital markets are maturing. Take advertising, the lifeblood of Alphabet and Meta, and a growing sideline for Amazon, Apple and Microsoft. During past downturns, ad spending fell but spending on digital ads kept growing, as advertisers pulled their budgets from old media like tv and newspapers and shifted adverts online. Today, much of that migration has already taken place: about two-thirds of ad spending in America this year was digital. Online ad platforms are thus vulnerable to the cyclical shifts that have long battered their offline rivals. In July Meta reported its first-ever quarterly drop in revenue; in October it reported another.

The next change is competition. For years tech was synonymous with concentrated markets: Google monopolising search, Facebook dominating social media, and so on. These days competition is fierce. Part of the reason for Meta’s pain was that new rivals, particularly TikTok, caused the first-ever drop in user numbers at Facebook, its flagship social network. Tech firms are also trespassing more on each other’s turf. Amazon’s cloud-computing arm has seen a sharp slowdown in growth, partly because Google is pouring billions into its own cloud service, taking big losses in order to gain a toehold in the business. Netflix, which for years had streaming virtually to itself, now faces competition not just from Disney and Warner Bros but from Apple and Amazon, which can splurge more liberally on content. That is one reason why its market value has dropped by 50% this year.

These changes in the structure of the tech business have coincided with headwinds that are particularly troublesome for digital companies. In America the Federal Reserve has raised the upper bound on its policy interest rate to 4.5%, from 0.25% in January, as it battles inflation. This makes life harder for all businesses. But tech companies, whose high valuations reflect investors’ belief that they will deliver outsized earnings far in future, look much less appealing in a world of high rates, which erode the present value of those promised earnings.”

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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.