This article first appeared on Yahoo Finance Technology, a weekly newsletter that highlights our original industry content. Get it delivered directly to your inbox every Wednesday before 4pm ET. Subscribe
Wednesday, June 15, 2022
Tech companies, big and small, bear the brunt of the market sell-off
The S&P 500 officially entered a bear market on Monday after falling more than 20% from its January highs amid a storm of sky-high inflation, the war in Ukraine, rising oil prices, COVID-19 lockdowns. 19 in China and a new interest rate increase of 0.75% on Thursday.
And some of the biggest losers in the months-long rout, tech companies, benefited the most as interest rates hovered around 0% during the pandemic.
Netflix stock (NFLX), goal (GOAL), NVIDIA (NVDA), Amazon (AMZN), Microsoft (MSFT) and Alphabet (GOOG, GOOGLE) have a reduction of more than 20% so far this year. It’s not just about mega-cap stocks, either. Pandemic Dears like DocuSign (DOCU), okay (OKTA) and Zoom (ZM) all fell by as much as 60% in 2022.
“We’re basically in bear market territory right now because the Federal Reserve bank is raising interest rates to fight inflation,” explained NYU Stern School of Business professor Anindya Ghose. “Unfortunately, we are now at the height of the recession and are likely to enter stagflation in the next quarter.”
And with tech companies slowing hiring and revising earnings projections, the industry may have more shocks ahead. That means slowdown in hiring in companies like Amazon and layoffs at firms like online real estate platform Compass and streaming giant Netflix.
Layoffs and revised guidance
Stocks of technology companies soared during the pandemic as consumers stayed home and workers fled their offices for their homes. Consumers needed access to devices including laptops, webcams, and monitors, while corporations needed to develop their cloud capabilities and online communications platforms to help people work from home.
Google parent Alphabet, Amazon, Apple and Microsoft hit all-time highs in 2021, with each company easily outperforming the tech-heavy Nasdaq and the broader S&P 500.
Alphabet and Amazon hit $2,977 a share and $185.97, respectively, while shares of Apple hit a high of $179.45 and Microsoft hit $343.11. Big Tech’s profits were so massive that the market capitalizations of Alphabet and Microsoft briefly exceeded $2 trillion.
Then there is Apple. After rising record quarter after record quarter, its market capitalization surpassed $3 trillion, making it the most valuable publicly traded US company in history.
But the wheels fell off the Big Tech party bus, along with the bumpers, the windshield, and the entire rear half.
So far this year, Alphabet shares are down 26%, while Amazon shares are down an impressive 39%. Apple shares are down 25% and Microsoft shares are down 31% since the start of the year.
While all four companies are taking hits, each faces different obstacles. Alphabet is dealing with tough comparisons with its 2021 earnings and revenue, not to mention a potential slowdown in ad spending as inflation and interest rates rise and the war in Ukraine drags on.
At Amazon, consumer spending is slowing compared to the peak of the pandemic, and the company now has too much warehouse space and too many workers on payroll.
According to Justin Post of BofA Global Research, from 2019 to 2021, Amazon’s workforce doubled and its logistics square footage grew by 85%, leading to excess capacity and staffing. As a result, Amazon could see its lowest retail margins in 15 years.
Meanwhile, Apple is dealing with lockdowns in China that affect both consumer spending and production in the country. During the company’s second quarter 2022 earnings callApple CFO Luca Maestri told analysts he expects the iPhone maker to take a $4 billion to $8 billion hit from COVID shutdowns and ongoing chip shortages.
Then there’s Microsoft, which saw its Q3 2022 earnings rise slightly but has since revised down its Q4 guidance due to concerns. on foreign currency exchange rateswhich may affect the cost of supplies from other countries and the likelihood that foreign customers will buy US products.
The result of this mega-cap disaster? Amazon is slowing hiring at its retail division and is looking sublease parts of their warehouseswhile Apple is supposedly slowing down the hiring of geniuses at their Apple Stores. Microsoft, for its part, is tightening its hiring, slowing the onboarding of new employees for its Teams and Office divisions.
The winners of the pandemic are falling hard
Large-cap stocks aside, shares of major pandemic players like DocuSign, Okta and Zoom are also taking a hit as the tech industry’s joyride crashes against inflation and recession fears.
Zoom, which became synonymous with happy hours and video chat weddings in the early days of the pandemic, saw incredible growth in 2020. On January 2 of that year, Zoom stock was trading at $68.72; on October 19 they reached $569.43 per share. As of June 14, 2022, the stock was trading at $106.86, a more than 81% drop in value from its peak.
The DocuSign online application signing service and the Okta security platform also perform poorly. After reaching $310.05 in August 2021, DocuSign dropped to $57.82 as of June 15, a drop of 81%. Meanwhile, Okta was trading at $291.78 in February 2021 and fell to $83.78 on June 15.
However, unlike large-cap companies, Zoom, DocuSign and Okta are yet to talk about layoffs or hiring slowdowns.
Not everything is pessimism
While the party might be over for tech stocks for now, Ghose says investors could see some benefit if they plan to hold on for the long haul.
“Shares of big tech companies are available at significant discounts and if you are a long-term investor with more than two or three years on the horizon, this is a very good time to buy,” he said.
He added, optimistically, “Fortunes are going to be made on the other side of all this.”