2022, collapse in income value
In 2022, the music died suddenly. A rampant inflation has caused a collapse in the value of future earnings for speculative businesses. It has also forced consumers to tighten their wallets. The war in Ukraine and the deterioration of geopolitical relations between China and the West have increased uncertainty. The value of high-growth but unprofitable companies has fallen. Tech companies quickly adapted to the new reality. Many have shut down or canceled projects to reduce costs.
Which ones will make it in 2023?
Consider three characteristics: the geographical location of a company, its sector of activity and its size. Few countries or regions have escaped the early phase of the tech business crisis. As investors reassessed future margins, the value of tech companies around the world fell. How painful the crisis will be will depend on future sales. Those who will suffer the most will be those who depend on Western consumers who are hit by inflation. These are primarily American and European companies, which mainly sell on their home markets.
Other large companies are also exposed. Of the ten largest non-Western tech companies by market capitalization, eight account for more than 40% of their revenue in the US and Europe. The two that aren’t in this case are both Chinese (Meituan, a great delivery app, and Tencent, the social media giant). Although Chinese companies are theoretically well-placed to benefit from the tech crisis, they face problems specific to their country: Chinese regulators are trying to control the tech giants for fear of them becoming too powerful.
The sector variable
Sectors will be more important than regions. Product-oriented technology companies were the first to see a decline in sales in 2022. This phenomenon is likely to continue. Sales of personal computers are expected to decline in 2023 (as in 2022). The Netflix video streaming platform, which had also benefited greatly from the pandemic, announced a drop in subscribers for the first time in ten years. Analysts expect Netflix to return to growth in 2023, but at a slower pace.
Tech companies that make money by selling ads, like Google or Meta, have struggled as marketing budgets have been slashed. But even as ad spending rises, Apple’s changes to its privacy policies that make it difficult to attribute online purchases to specific ads will continue to weigh on the industry. Professional software manufacturers such as Adobe, Oracle or Sales-force are likely to do better.
Business customers tend to enter into long-term contracts that are less sensitive to fluctuations in consumer demand. The growth of the cloud computing sector by tech giants such as Amazon, Google and Microsoft shows little sign of faltering as applications, services and data are increasingly moved online. This could generate new vulnerabilities and therefore multiply the opportunities for cybersecurity firms like Crowd-Strike, whose businesses could also benefit from the fear of Russian or Chinese cyberattacks.
The size advantage
Size will be another deciding factor. Large companies tend to be more resilient to crises, partly because they have a lot of cash. Cash from the Big Five (Alphabet, Amazon, Apple, Meta and Microsoft) has grown to more than $500 billion, representing 27% of the reserves of non-financial companies in the S&P 500. Cash is an asset for two reasons: companies are able to recruit and retain the best talent, allowing them to buy out smaller companies at the best price.
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Mid-sized tech companies are in (and their spending sprees are less likely to be scrutinized by regulators). It is to be expected that the approximations will continue. After the bursting of the dot.com bubble in 2001 and the global financial crisis of 2007-2009, the number of tech acquisitions quickly returned to pre-crisis levels, but the average price of deals fell. In other words, the big tech shake-up could help tech giants become even bigger in 2023.
Guy Scriven, American technology editor, The Economist
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