Big Tech – Good Or Bad For You?
The Investment Perspective – December 2022
“Neither the investing method nor the fundamentals of the business are right or wrong because the mood of the market is favourable or unfavourable toward the “stock”. That is because when you really think about it, “stocks” (shares) are all about the financials and the trading price, the share price… the cash up value. What matters more is the economics of the business”
Peter Flannery
Key Points:
- Who are they?
- How do they make their money?
- Will their past profitability be sustainable in the future?
- Take a look, what do you think?
What’s happening with technology investments?
The above graph tracks the number of layoffs across a variety of companies in the technology sector. Where is Alphabet?
We are seeing technology companies layoff staff in order to reduce costs.
On the one hand this sounds bad because they need to take this action. On the other hand, it is prudent business management which you and I as investors are happy to see if it’s needed.
To put this in other way, if we are playing the share market and investing in the stock, then we might be worried. That’s because layoffs could mean lower profits in the near-term which usually means lower trading prices as well.
However if we are investing in the business, then we may see this as prudent business management on the basis that the business has strong underlying business economics and is adjusting operations, working its way through the shift in market conditions.
Why the layoffs anyway?
There are a number of reasons. For some tech companies whose profitable growth is further out into the future, they need to cut costs either for that reason or because they may not even be profitable yet.
Reducing losses in an increasingly challenging economic environment (profit margins squeezed) is necessary for some to survive. This does not apply to well-known mainstream tech companies that are strongly profitable.
Shrinking advertising budgets relate to the likes of Twitter and Snapchat whereas companies like Coinbase and Kraken are forced to deal with the rationalisation of the cryptocurrency market.
Higher interest rates are also impacting some companies as the market they service feels the pinch of those increasing interest rates as well as increased costs (inflation).
Slowing economic growth and the possibility (the probability ?) of recession encourages some companies look ahead and take steps to protect profitability.
Although technology companies represent a significant proportion of the US share market, tech jobs only account for less than 3% of total employment in America. It is likely that those highly-skilled tech workers who lose their jobs, because of their level of education will be able to find work elsewhere.
How do big tech make money?
At WISEplanning, we invest in large technology companies more so than small upcoming technology companies usually.
This is because upcoming small tech can make us rich but on the other hand, it’s tricky locating the right ones.
There is a reason that many successful investors who retain their wealth throughout a variety of changing market and economic cycles continue to build wealth. It has quite a bit to do with reliability and certainty as distinct from speculation and hope.
It’s about compounding growth
Speculating on growing young tech companies is a fad that comes and goes. Successful upcoming small tech companies tend to be the exception to the rule.
Investing in businesses with sound economics allows us to compound growth long-term, a different thing to speculating on the share market.
Investing? It’s not just buy and hold
Unfortunately it’s not as simple as buy, hold and forget. Things do change. Some of those changes are not good and a warning to change direction.
Some changes are quite good actually and can be taken advantage of.
For example, as business performance or the business economics improve, that’s a signal to continue to invest.
Also when the market becomes unhappy about a particular business and rerates the trading price down, that is usually our opportunity to take advantage of more favourable pricing, particularly when it’s part of a market wide down turn (sound familiar?).
This in turn helps build in better returns longer term and more of that compounding growth.
Investing in good businesses that grow long term sounds a bit old fashioned when certain fads come along. However it’s hard to beat long run.
“In the early years, the money we make investing is driven by the voting machine (market sentiment). Longer term, the money we make is driven by the weighing machine (the fundamentals of the business)”.
– Warren Buffett