What the market crash means for tech companies
In a day of turmoil for the markets, tech got hit hard. But there are glimmers of hope for some in the industry.
It's not quite 2008, yet. But Monday was a bad day for every sector of the economy — and technology was firmly included.
Global stock, bond and commodity markets were thrown into turmoil amid coronavirus fears, oil disputes and a general sense that the economic cycle had begun to turn. Here are a few of the potential impacts on the industry going forward.
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Not all routs are made equal
Investors, anticipating the negative economic impact of coronavirus, sold off stocks in almost every sector on Monday. As markets closed in the U.S., the S&P technology index was down more than 7%. When stocks go down, that almost certainly means a drop in consumer demand for goods, and it will be felt across the economy. Silicon Valley will not be spared.
"The psychological and wealth effects from a falling equity market impact everyone, but especially the top 25% of earners that do the majority of consumption," said Constance Hunter, chief economist for KPMG. "This pullback will hurt the economy and will be a significant factor in the recession we expect to hit as the year progresses."
But some companies were more affected than others. When growth is slow or negative, investors tend to turn toward defensive plays — companies that can be counted on for a stable and reliable return — rather than bets on companies with yet-to-be-realized potential. That might explain why Apple's shares only fell 5.8% on Monday, compared with unprofitable Uber's 8.5% and Tesla's massive 10.9% fall.
Bigger may be better
Rachel Ziemba, an economist at the Center for a New American Security, told Protocol that given the relatively strong balance sheets of many large tech companies, they may be in a position to capitalize on the crash.
"They tend to have significant cash reserves and thus might look for an opportunity for more buybacks and consolidation," she said.
And big tech has something else to be thankful for, too: a distraction. The latest turmoil has changed the subject of conversation from talk of new tech regulations, Ziemba noted. "Clearly these dynamics also completely take people away from the broader regulatory debate we were engaged in only a few months ago," she said.
The markets weren't just dealing with stock sell-offs Monday. Over the weekend, Russia refused to further curb oil supply, and Saudi Arabia decided to increase its supply, flooding the market with oil to tank the price and punish Russia. So far, the strategy's worked: Oil fell the most in almost 30 years on Sunday, with crude oil approaching $30 per barrel, almost half its price in January.
That brings with it corresponding cost savings for oil-reliant tech firms that rely heavily on transportation — like Amazon, for example, whose delivery fleet includes over 50 Boeing 767 freighter jets.
And if COVID-19 means people increasingly avoid in-person interactions, that could bring plenty of opportunities for certain tech companies. Online social networks like Facebook, Snapchat and Twitter, for example, will assume an even more central role, Hunter predicted.
"People are engaging in social distancing, and that makes social networks more powerful and viable," Hunter said.
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One sector particularly — and unsurprisingly — hard hit by the oil crash: energy. Producers were already under pressure from low oil prices, and this latest crash will only make that worse.
That could present an opportunity for firms with cloud-computing divisions, such as Microsoft, Alphabet and Amazon, all of which already sell computing services to the oil and gas industry. In January, Barclays said efficiencies generated from cloud-computing services could save $3 a barrel in production costs — which, at the current oil price, is extremely significant.
Cloud firms could see a boost in demand for their services from oil producers increasingly looking to use tech to cut costs — if big oil can afford to.
What about the startups?
It's safe to say that no company wants to go public in the current stock market environment. Ziemba said that companies may "stay private for longer," in part because the "credit market is starting to dry up." That could pose a problem for some companies — like DoorDash and Postmates — which don't turn a profit, may soon need new funding, and may now have to wait to IPO. If venture capital funding dries up in the short term, as it did in 2008, that could quickly escalate into a full-blown crisis.
But in general, tech companies depend far less on debt financing than do other sectors, which means Silicon Valley will likely be less affected by tightening bond markets, Hunter said.
Looking further ahead, though, some good could come from this. A notable move on Sunday night was the plunge in U.S. 10-year Treasuries, which yielded an all-time low of 0.32%. That means investors are getting almost no return on their money — a problem for funds and institutions, like pension funds and insurance firms, that have to generate returns for their customers. With further interest rate cuts looking likely, those low returns may stick around for a while. Once the immediate panic is over, that could lead investors to look elsewhere for returns: namely, to riskier but higher-yielding investments like venture capital.
Amid low rates in the early 2010s, money poured into venture capital, fueling the most recent tech boom. If 2020's crash becomes a crisis, it could end up sparking a similar effect.