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Wednesday, June 15, 2022
Tech companies big and small feel the most heat from the market selloff
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, spiking oil prices, COVID-19 lockdowns in China, and a fresh 0.75% interest rate hike on Thursday.
And some of the biggest losers in the months-long rout — tech companies — benefited the most as interest rates previously hovered around 0% throughout the pandemic.
Shares of Netflix (NFLX), Meta (META), Nvidia (NVDA), Amazon (AMZN), Microsoft (MSFT), and Alphabet (GOOG, GOOGL) are all off more than 20% year-to-date. It’s not just the mega-cap stocks, either. Pandemic darlings like DocuSign (DOCU), Okta (OKTA), and Zoom (ZM) all slumped as much as 60% in 2022.
“We are basically in bear market territory now due to the Federal Reserve bank increasing interest rates in order to combat inflation,” explained NYU Stern School of Business professor Anindya Ghose. “Unfortunately we are now at the cusp of recession and likely entering stagflation in the next quarter.”
And with tech companies slowing hiring and revising earnings projections, the industry may have more shocks ahead. That means hiring slowdowns at companies like Amazon and layoffs at firms like online real estate platform Compass and streaming giant Netflix.
Layoffs and revised guidance
Shares of tech firms skyrocketed during the pandemic thanks to consumers staying indoors and workers fleeing their offices for their homes. Consumers needed access to gadgets including laptops, webcams, and monitors, while corporations needed to build out 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 outpacing the tech-heavy Nasdaq and broader S&P 500.
Alphabet and Amazon touched $2,977 per share and $185.97, respectively, while shares of Apple topped out at $179.45 and Microsoft reached $343.11. Big Tech’s gains were so massive that both Alphabet’s and Microsoft’s market caps briefly exceeded $2 trillion.
Then there’s Apple. After riding high on record quarter after record quarter, its market cap surpassed $3 trillion, making it the most valuable publicly traded U.S. company in history.
But the wheels have fallen off Big Tech’s party bus, along with the bumpers, windshield, and its entire back half.
Traders work on the floor of the New York Stock Exchange (NYSE) during morning trading on May 06, 2022 in New York City. Following a day that saw a drop of over 1000 points over inflation fears, the Dow Jones Industrial Average was down over 200 points in morning trading. (Photo by Spencer Platt/Getty Images) ·Spencer Platt via Getty Images
Year-to-date, shares of Alphabet are off 26%, with shares of Amazon down a stunning 39%. Apple shares are down 25% and Microsoft shares have dropped 31% since the start of the year.
While all four companies are taking hits, each faces different obstacles. Alphabet is dealing with tough comparisons to its 2021 earnings and revenue performance, not to mention a potential slowdown in advertising 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 now the company has too much warehouse space and too many workers on the payroll.
According to BofA Global Research’s Justin Post, from 2019 to 2021 Amazon's headcount doubled and its logistics square footage grew by 85%, leading to overcapacity and overstaffing. As a result, Amazon could see its lowest retail margins in 15 years.
Apple, meanwhile, is contending with lockdowns in China hitting both consumer spending and production in the country. During the company’s Q2 2022 earnings call, Apple CFO Luca Maestri told analysts that he expects the iPhone maker to take a $4 billion to $8 billion hit from COVID shutdowns and the ongoing chip shortage.
Then there’s Microsoft, which notched a slight beat during its Q3 2022 earnings, but has since revised its Q4 guidance downward due to concerns regarding foreign currency exchange rates, which can impact the cost of supplies from other countries and the likelihood foreign customers will buy American goods.
The result of this mega-cap mess? Amazon is slowing hiring in its retail division and looking to sublet parts of its warehouses, while Apple is reportedly slowing the hiring of Geniuses in its Apple Stores. Microsoft, for its part, is putting the squeeze on its hiring, slowing onboarding of new employees for its Teams and Office divisions.
Pandemic winners are falling hard
Mega-cap stocks aside, shares of major pandemic players like DocuSign, Okta, and Zoom are also taking hits as the tech industry’s joyride smashes headlong into inflation and recession fears.
Zoom, which became synonymous with video chat happy hours and weddings in the early days of the pandemic, experienced incredible growth in 2020. On Jan. 2 of that year, shares of Zoom were trading at $68.72; by Oct. 19 they hit $569.43 a share. As of June 14, 2022 shares were trading at $106.86, a more than 81% drop in value from their peak.
Online app signature service DocuSign and security platform Okta are also performing poorly. After hitting $310.05 in August 2021, DocuSign is down to $57.82 as of June 15, an 81% drop. Okta, meanwhile, was trading at $291.78 in February 2021 and dropped to $83.78 by June 15.
Unlike the megacap companies, though, Zoom, DocuSign, and Okta aren’t yet talking about layoffs or hiring slowdowns.
It’s not all doom and gloom
While the party might be over for tech stocks for now, Ghose says that investors could see some benefit if they’re planning on holding on for the long run.
“Blue chip big tech stocks are available at significant discounts and if you’re a long-term investor with more than two to three years in horizon, this is a pretty good time to buy,” he said.
He added, optimistically, “Fortunes are going to be made on the other side of all this.”
