Overheard

• "The approach the administration has adopted would, in effect, impose significant costs on very many U.S. companies to protect the interests of only a very few." — IBM's Christopher Padilla warned that U.S. retaliation against European digital services taxes could lead to escalation — even hurting companies that haven't done anything wrong.
• "When everyone else thinks that China is not sexy, that's actually when you start to make real money." — DCM's Hurst Lin thinks now's a great time for the company's new $880 million Chinese-focused fund.
• "There was a lot of push from our investors." — PolicyBazaar CEO Yashish Dahiya said the company's rapid expansion was a "mistake" — but also that it was encouraged by investors such as SoftBank.
• "It's inevitable that Chinese tech companies will definitely decelerate from listing in the U.S." — Gartner's Roger Sheng said SMIC's forthcoming STAR Market listing is a sign of things to come.

The Big Story

Can tech earnings justify the gains?

Over 550,000 people have died from COVID-19. The U.S. unemployment rate is over 11%. And the Nasdaq 100 is up 23% this year.

Tech executives, analysts and investors have pointed to the "digital acceleration" brought on by COVID, claiming that the sector has much to gain from the work-from-home movement, the surge in ecommerce and other societal shifts that are all underpinned by technology — and, they say, it's also relatively insulated from the broader economic downturn. That's driven a huge surge in tech stocks. In the coming weeks, we'll find out if that surge was justified.

Earnings season kicks off next week, with Netflix, TSMC and ASML all reporting. Results from Big Tech will start to trickle in over the following week, with a flood of reports coming toward the end of the month. The numbers will offer our first glimpse at just how much tech's benefited from the pandemic — if at all.

• But analysts aren't optimistic. According to FactSet research, they expect the IT sector to report a 9.4% decline in earnings for Q2. That's much worse than the 0.8% earnings growth they expected on March 31.

Low expectations could mean nice surprises in the coming weeks, especially if it turns out that investors are right.

• But Morgan Stanley analysts noted this week that any positivity "may be in share prices already." Penn Mutual Asset Management's Mark Heppenstall agreed, saying "there has been a lot of good news built into valuations at this point."
• With investors so optimistic, there's the possibility of big price drops if earnings don't meet those high investor hopes.
• Still, Wedbush's Daniel Ives told me that "secular growth stories" mean there's still more upside potential. Valuations, he said, are mostly based on 2021 numbers rather than this coming season.

VCs I spoke to said the earnings probably won't affect their investment decisions, though they will be looking for trends.

• Elsewhere Partners' Chris Pacitti said he'll be looking at the performance of a range of sectors, with a particular interest in whether retail and hospitality-tech companies might recover faster than expected.
• Forge CEO Kelly Rodriques, meanwhile, said he's paying close attention to the "stay-at-home" sector of Zoom, Peloton and Cloudflare.
• And Emergence's Joe Floyd told me that Amazon is the stock he's watching most closely. "They were the perfect COVID hedge," he said, and with "sky-high" investor expectations, there's a lot on the line.

What not to expect from this quarter? Well, Pacitti said he wants to know what the "new normal" is, but "tech earnings will not give a satisfying answer to that question."

• And anyone hoping for useful guidance may be disappointed. "Guidance at this point for most companies and management teams is like playing a game of blindfolded darts," Wedbush's Ives said. Time to start getting excited for Q3 earnings instead, I guess.

Up To Speed

• Monday: Uber bought Postmates for $2.65 billion. Palantir said it filed for an IPO. Sequoia India raised $1.35 billion for two new funds. PPP loan data was released — and it was messy.
• Tuesday: Samsung said its profit likely rose 23% last quarter. Microsoft was reported to be interested in buying Warner Bros.' games division. Binance bought Swipe. DocuSign bought Liveoak Technologies. Sina received a management buyout offer worth $2.7 billion.
• Wednesday: SAP's earnings beat estimates. Ant Financial was reported to be planning an IPO at a $200+ billion valuation. Silver Lake bought Silae, reportedly for $560+ million. Slack bought Rimeto. SUSE bought Rancher Labs, reportedly for $600+ million. BlueCity shares soared on their debut. Nvidia overtook Intel's market cap.
• Thursday: Sony invested $250 million in Epic Games, at an $18 billion valuation. Coinbase is reportedly planning a direct listing. Coupang was reported to be buying Hooq's software assets. QuantumCTek's shares jumped 1,000% upon listing.
• Today: Rackspace filed for an IPO. Tencent said it was in talks to buy Leyou. TSMC sales suggested its Q2 beat expectations. The U.S. is expected to announce sanctions against France over its digital services tax.

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Diving Deeper

B2B is where fintech's at

Fintech's in a weird patch right now. Unlike some tech sectors, it hasn't been massively accelerated by the pandemic — but it hasn't particularly suffered, either. "It's sort of like an unknown unknown," veteran fintech investor Peter Berg said of fintech's outlook. Berg used to run Visa's corporate VC arm, before moving into his current role leading business development at Very Good Security, a SaaS encryption provider.

One big area he's got his eye on: B2B fintech. "The consumer side has been kind of sexy for a while, and you've seen a lot of companies trying to serve every flavor of underbanked or niche customer," Berg said. "I think business banking and services for businesses … have been maybe less sexy, and have gotten less focus over time." In particular, "business-to-business payments is not properly solved."

• Northzone's Paul Murphy also recently told me that the "B2B banking space has dramatically accelerated because of [COVID]," saying that for one of the firm's portfolio companies, "it's all moving quicker than they expected." (Stay tuned to Protocol for a Q&A with Murphy next week.)

But across the fintech board, expect increased consolidation to be an upshot of COVID, Berg says.

• "There were a lot of [fintech] acquisitions" even before the pandemic, he said. "I think that might continue to a certain extent."
• Neobanks, which might struggle in the coming climate given the intense competition in the space, could be one sector ripe for the picking. "What you'll probably start to see is incumbents might buy their way into some more innovative approaches," Berg speculated.

And watch out for corporate VC budgets being slashed, "if history is any indication," Berg said.

• "When times are bad … it's one of the first places to cut," Berg said. But based on his experience at Visa, he thinks that would be a mistake: CVC can be a great strategic tool when used as an extension of R&D, he explained, and that's more important now than ever.
• "A lot of interesting innovations and companies are built during [downturns] … I would hate to see folks lose out on that. Financial VCs are very much attuned to that — I hope strategically minded corporate VCs think similarly."

Money Talks

Jason Child, Splunk CFO

Has COVID-19 been net good or bad for the tech industry?

I wouldn't call COVID-19 a net "good" factor within the tech industry, but rather a catalyst for transforming business in ways many did not expect. For example: COVID-19 created a global teleworkforce, which helped organizations accelerate their digital transformation and, subsequently, cloud transformation initiatives. We have seen several customers tackle digital projects they thought would take three to five years to complete in just a few months. As more companies rapidly shift their business models to the cloud to meet surges in customer demand, COVID-19 will continue to reshape business as we know it.

What's been your worst financial decision?

That's an easy one: I sold all of my 2001-era Amazon.com stock options that had a $6 strike price, at an awesome return of 5x. Which would be $30. I'll let you do the math on that one.

What's your No. 1 tip for adapting your company to post-COVID?

The work-from-anywhere reality is here to stay, and it's going to keep evolving. There are a bunch of productivity lessons organizational leaders have learned in the past few months, and there is much more work to be done to reinforce and foster togetherness and serendipitous creativity, remotely at scale. I look forward to seeing more leaders integrate those two critical business values in the second half of the year.

What piece of financial advice should a founder ignore?

I'll instead give one my favorite pieces of financial advice: Never sell a dollar for 90 cents. In other words, you should never, at any point of your business growth, sell your goods or services at a negative contribution margin. Assuming that selling at a loss, under the notion that with volume you'll turn profitable, is a risky proposition — and it rarely works. Folks are often mistaken that this was an approach that Amazon took early on. It did not … we were relentless about maintaining a positive contribution margin, even when the company had large losses in its early days.

Coming Up

• Netflix reports earnings on Thursday. With its stock near all-time highs, investors seem to be expecting very good news.
• Over in hardware world, ASML reports on Wednesday, followed by TSMC on Thursday.
• The EU will decide if Apple owes $16 billion to Ireland in back taxes on Wednesday. But the saga probably won't come to an end just yet: Officials have said to expect a further appeal.

A MESSAGE FROM PHILIPS

Stronger Care ... from anywhere, to anywhere

At Philips, we're pioneering stronger care networks with technologies we've spent decades innovating. With connected care solutions from telehealth to at-home monitoring, today's healthcare workers can face today's greatest challenges with smarter virtual tools. See how our telehealth technologies help doctors and nurses deliver care from anywhere, to anywhere.

Learn more.