The downfall of the tech industry?
Intro
When I graduate, I’m interested in working in the technology industry. Companies like Apple, Google, Microsoft, and others all seem very attractive to me, especially with their perks of work-from-home, flexible hours, and high pay. However, the tech industry is crashing.
Last week, Meta (Facebook’s parent company), Alphabet (Google’s parent company), Amazon, and Microsoft dropped to their lowest stock prices in 2022, losing $5.5 trillion in market value. Meta is doing especially badly, as their stock is down 70% this year — that’s the worst result in the S&P 500, a stock index tracking the top 500 companies in the United States. That’s nearly $700 billion lost, which is a greater value than 496 of the other companies in the index.
David Bahnsen, chief investment officer of The Bahnsen Group, said in an interview with Investors Business Daily that stocks “that have traded at excessive valuations have to be repriced,” especially this year.
“Some Big Tech companies are still being adjusted to the realities of a more sensible valuation that is less speculative and more reality-based,” Bahnsen said.
Why tech stocks are dropping
Tech stocks, especially in the beginning of this year, were hit hard by inflation and rising interest rates to combat that inflation. The Fed’s zero-interest rate policy, implemented in March 2020 to spur economic growth during COVID, really pushed investors to put their free cash into tech — there was very low risk. The hope was that these tech companies would be able to pay off a few years from now. Big Tech made up 50% of the S&P 500 in 2021. However, the Fed announced that they would raise interest rates, just as they did last week. As a result, tech investors pulled out, wanting more promised profits.
Geopolitical conflict like the war in Ukraine also continues to create economic conflict. A lot of tech companies stopped doing business in Russia. For example, because Netflix blocked its app and website in Russia, the company lost 700,000 subscribers. They’ve been losing value on their stock ever since. There are other examples that are less consequential. Qualcomm, the US chip manufacturer, said that it would comply with US sanctions and cease business with Russia. However, they’ve taken less of a hit because their Russian and Ukrainian accounts are less than 1% of their revenue.
Another smaller, but overlooked aspect of sinking tech stock prices is Apple’s relatively new update in iOS 14.5, App Tracking Transparency (ATT). ATT asks people if they want to “opt out” of app tracking. For Apple, although this is in the name of “privacy,” this is a thinly veiled attempt at reducing Facebook’s (and other competitors) advertising revenue. It worked so far — Alphabet, Snap, Twitter, and Facebook have collectively lost $10 billion in advertising revenue, according to the Financial Times.
The results
For employees, it’s a bloodbath in the tech industry. Most major companies are cutting costs and laying off employees. At the end of August, Snap announced that they were laying off 20% of their employees. Currently, Amazon and Apple are in a major hiring freeze because they are worried about smaller holiday growth. COVID is also affecting production of the iPhone 14 in China. Meta is also starting large-scale layoffs with a formal announcement to start Wednesday. Lyft just laid off 13% of its workforce, or around 700 employees. Stripe and Chime also will lay off 14% and 12% of their workers, respectively. However, the largest (percentage-wise) and the most public-facing set of layoffs was from Elon Musk-owned Twitter — he cut 50% of his 7,500-person workforce, including the chief executive, finance chief, and legal and policy affairs chief. During this time period, Twitter closed their office and suspended their badge access. According to multiple reports, Twitter is asking some of their employees to even come back.
Closing
Current hardships in tech is something that investors haven’t seen since the dot-com crash in 2002. As a result, people are extremely reactive. Though sentiments might stabilize sometime in the future, there are still huge waves of layoffs that employees need to weather through. We’ll see if I can find a job after I graduate.
