This analysis was first published in SvD Näringsliv, in Swedish, on January 17th, 2022.
The tech sell-off is hitting hard — but not evenly. The very largest companies have entirely different problems. Like Washington, Brussels, and billion-dollar lawsuits.
High inflation, possible rate hikes, and the risk that the US Federal Reserve will start easing off on its asset purchases. That’s been enough to rattle the stock markets on both sides of the Atlantic. And it’s been especially rough for tech stocks.
In Sweden, for example, cloud services company Sinch and the magazine platform Readly have lost over 11 and 15 percent respectively so far this year. In the US we’ve seen drops of more than 15 percent for hyped-up newcomers like UiPath (automation), Braze (communications), and Squarespace (websites and e-commerce).
But the sell-off doesn’t hit everyone equally. The very largest tech companies have served as the locomotive for a big chunk of US market performance for some time now, not just within their own sector. Research from the analysis firm Gavekal shows that since May 2021, half of the gain in the S&P 500 has come from just five stocks: the familiar Apple, Microsoft, Google, Tesla, and chipmaker Nvidia.
The picture that emerges is of a tech sector splitting into two distinct camps that both behave — and get treated — very differently: big tech and everyone else.
The first category holds giants like the ones just mentioned. Mature public companies that still post strong growth, several of them with good profitability. They’ve fallen only a few percent overall. These are companies so established that everyone has to factor in their plans and moves — even non-competitors.
The biggest risk they face isn’t the stock market — it’s politics. In the UK, Meta (formerly Facebook) was sued for around SEK 28 billion for improperly using user data. In the US, a federal judge recently let another lawsuit against Meta from the Federal Trade Commission proceed. The FTC contends Facebook has become a monopoly and is threatening to unwind its acquisitions of Instagram and WhatsApp, which took place in 2012 and 2014 respectively.
The courts will settle the legal question, but the market already treats Meta like a monopoly. The same goes for the other big-tech companies in the category. A mobile market without Apple is unthinkable. Amazon becoming less relevant in US e-commerce is a highly unlikely scenario. And searching online has long been synonymous with “googling”.
In the second category you find the next generation of companies. Smaller, fast-growing firms investing at the expense of profitability. Companies like Bumble (dating), Duolingo (language learning), and Affirm (payments). Often they’ve gone public out of a venture-backed environment where growth is prioritized above everything else.
This is the category that has taken, and is taking, the hardest hit as investors seek less risk in their portfolios. On the US market, this category has gone from being traded at an EV/Sales multiple of 16 times in February 2021 to around 7 times revenue now, according to Goldman Sachs.
How worried tech companies should be about the market may therefore depend, to some extent, on which category they belong to. And for those that haven’t made it public yet, the window may have closed, at least temporarily.
This week, the first IPO of the year, from HR company Justworks, was postponed — with a reference to “current market conditions”.