We may not be in a recession, but we’re clearly in a tech-cession.
Big tech is grabbing headlines for all the wrong reasons these days, whether it’s for the 30,000 workers they’ve laid off just this month or the Department of Justice’s antitrust lawsuit against Alphabet. Next week, analysts think their fourth-quarter earnings reports could show that profits from Meta, Amazon, and Alphabet each fell more than 10% last quarter.
But this tech-cession goes much deeper than bad earnings, layoffs, lawsuits, and rate hikes. Big tech is fighting to stay relevant after more than a decade of rapid growth, and it’s struggling to reinvent itself. It’s the classic innovator’s dilemma: Companies grow so much that they can’t pivot their strategies when disruptive businesses start nipping at their heels.
In other words, big tech is going through a corporate mid-life crisis.
A societal shift
It’s a tale as old as time. You reach your 40s or 50s, and you start second-guessing your life’s purpose. You change careers, move states, or get life-altering plastic surgery. Or you buy that proverbial motorcycle and ride it down that freeway. All just to feel something as you age.
We’re all familiar with it (or we will be eventually). Believe it or not, many companies go through the same ordeal as they get older. In a quickly-evolving society, trends change and companies have to adapt. History is littered with the tombstones of once-dominant businesses that shriveled up because they couldn’t change with the times.
Luckily, big tech (Microsoft, Apple, Netflix, Meta, Amazon, Alphabet) hasn’t had to deal with this yet. Tech has dominated our lives and our portfolios for over a decade. The numbers speak for themselves:
- Those six companies are worth $6.6 trillion, 24% of the S&P 500’s total market value.
- During the 2010s bull market, their stock prices increased by 15-fold, compared to the S&P 500’s fourfold gain.
- Over the past 10 years, big tech stocks and the S&P 500 have moved in the same direction on 75% of days.
- Big tech captures nearly 100% of our attention each day. (OK, that’s just an estimate, but it’s close!)
It’s hard to imagine our daily routines without big tech’s influence. But there’s been a subtle societal shift to alternative products and services that’s challenging the business model that big tech built its dynasty on.
Meta and Alphabet get a majority of their revenue from ads, yet ad spending is projected to decelerate for a third straight year. More than 99% of Netflix’s revenue is from streaming services — a problem, when your subscriber growth is stagnating. Apple, one of the most valuable companies in the world, relies on iPhone-related business lines at a time when global smartphone demand is declining.
Times are changing, and big tech is feeling the world slide out of its grasp.
The innovator’s dilemma
Back to the headlines.
Lately, these mid-life crises have led to some eye-popping announcements, like Meta’s metaverse experiment and Microsoft’s billion-dollar investment in OpenAI (the parent company of ChatGPT). Instead of leaning on traditional business lines, big tech has pursued new ventures — ones that could eventually lead their businesses into the next phase of growth. A few big tech companies (Meta, Microsoft, Google and Amazon) have noticeably ramped up investing back into their businesses over the past few years.
It hasn’t been all good news, though. Since November, big tech has laid off more than 50,000 workers. Part of these layoffs were in response to a tough economy — no surprise there — yet each layoff announcement told the same strategic story. C-suites overhired, and they’ve now chosen to shift their resources to long-term opportunities. Tech hiring in general hasn’t trailed off significantly either, according to Bureau of Labor Statistics data. This story may be one of a transforming industry, rather than an ailing one.
Still, it may not be an easy road ahead for big tech. The transition could put a lot of pressure on management to right the ship quickly, especially from investors with more short-term objectives.
We’ve seen that conflicts of interest flare up during earnings season, too, when slowing sales collide with big spending plans. In October, Meta stock fell 25% after its earnings release showed it ramped up spending on its metaverse project. On Tuesday, Microsoft’s shares dropped almost 5% during the day, after executives said its cloud computing and corporate software divisions would likely slow next quarter, even while emphasizing the company’s commitment to building an artificial intelligence arm.
These are massive companies that can be difficult to pivot, and we haven’t even begun to realize if these new ventures can actually pay off. This is the crux of the innovator’s dilemma — suddenly, you’re so successful that you can’t be nimble enough for success down the road.
To be fair, they have more than a fighting chance of pulling this off. Right now, big tech companies are sitting on about 10% of S&P 500 companies’ total cash hoard. That could come in handy for acquisitions or new ventures. And in a high-rate environment, investors tend to gravitate towards strong financials and quality balance sheets, favoring big names over smaller, speculative ones. The Fed is essentially cutting off the oxygen to venture capital funding, a move that could help big tech breathe easier.
Big tech, chapter 2
Big tech probably isn’t going anywhere. But while it may play a big role in our daily lives, the companies are working hard to build their next chapters. It’s a noble effort to stay cutting-edge, but as we’ve seen lately, it could be painful for workers, users, management, and investors.
Will these changes be enough to keep big tech relevant? Only time will tell. But if you’re holding US stocks, you should be paying attention. There may be new market leaders in the next bull market if big tech can’t find its footing.
*Data sourced through Bloomberg. Can be made available upon request.