What is the forecast for tech? It depends on whom you ask. For some, it’s contraction. For others, the money is flowing. Cisco is in the tank and has layoffs planned, even as Microsoft mints new billion-dollar businesses. Yahoo can’t keep its hands off the kids. Some companies are cribbing business models from Asia to monetize their social products.
Even the tech deities appear to be somewhat confused about what’s going on. Twitter and Box are going public in short order, and the new name of the tech game is stacking revenue. For some, of course. Even Foursquare is said to be dialing up its top line.
We’ve seen several billion-dollar acquisitions this year, and we’re not talking Instagram. There is excess, there is friction, there is Disruption, and yes, there are some things that are worth laughing about.
But one word that you don’t usually see stapled to the technology industry is “slump,” at least not lately. 2008 and the resulting financial ice-over are a half decade past, and the stock market is setting fresh records. Slump? Some think it, especially Chris O’Brien of the Los Angeles Times. His recent piece paints a bleak picture of the technology world, inferring that things are pretty rough at the moment. A sampling, for tone:
In a surprising turn, the tech industry is in a slump even as the U.S. economy picks up steam. [...] There even have been signs that tech’s dysfunction was having a wider effect. [...] Being labeled a “drag” is the ultimate insult for an industry that likes its growth fast and furious. But why has tech lost its mojo?
It’s an interesting thesis. We shall not post a point by point analysis, as that would be pedantic of us, but the concept is worth exploring. In brief, though O’Brien raises interesting points of softness in the technology sector, there isn’t much evidence that tech is experiencing anything on the level of a slump.
Lagging The Market
Key to O’Brien’s view of the technology industry is that it lies in contention with the rest of the economy. This feels all but odd, but it is his own framing. To wit:
And tech stocks have lagged the broader stock market this year. As of early August, the S&P 500 was up 19.68%, but tech stocks in the index were up only 11.1%, one of the lowest-performing categories
Two things about this stand out, first that an 11.1% in sector stock prices is a great year, and also that the companies that help comprise the S&P 500 index are hardly representative of the larger technology industry. Unless you feel that Automatic Data Processing, BMC Software, and Cognizant Technology Solutions are bellwethers. There are a number of firms on the list that you would recognize, but we are hardly dealing with the growth side of technology industry. That isn’t what the S&P 500 measures to boot, but that’s a different kick.
O’Brien goes on to quote an analyst, Patrick Moorhead of Moor Insights and Strategy to say things that sound vaguely intelligent: “What I’ve seen is that a lot of the tech heavyweights are having challenges. There’s a fundamental shift in the marketplace that many people are grappling with.” That somewhat aligns with the idea of a slump, so I suppose we can view it as relevant.
Strong stock market performance of the largest cap tech companies that isn’t quite as good as the rest of the market is not in any material way a slump. Let’s keep going.
Revenue and Profit
O’Brien’s article notes that, according to Zacks Investment Research (you’ve heard of them, right?) “profits in the tech sector in the first and second quarters declined from a year earlier 4.5% and 10.6% respectively.” What, precisely, Zacks considers “the tech sector” isn’t clear. And I wasn’t about to sign up for its for-pay stock market advice service to find out.
Let’s take on the point that tech earnings are slipping. According to Matt Nesto, analysts anticipate that technology sector profits “will fall by 9.5% in the second quarter.” If you control for Apple’s decline, that decline is less than 7 percent.
Also, by some estimates, tech-sector revenue is up year-over-year, and has been in all recent quarters. So, there’s that. Naturally, we are again only discussing the incomes of public technology companies, and not the myriad firms that remain private.
Slump? That feels more like a minor correction among one subset of technology companies: The mature giants. Surely they are not what we mean as the total “tech industry.” In no way. They employ huge swaths of its workers, but they are also not the only companies kicking out profits, hiring on overdrive and growing as quickly as possible.
To fairly demonstrate a slump, we must show that other slices of tech are slipping, and that the decline isn’t so mild. A few quarters of unimpressive profit after strong expansion is more correction, or breath, than slump. Let’s keep going.
Buy In And Buy Out
O’Brien states that, in “the first half of 2013, venture capitalists invested $12.7 billion, down from $13.6 billion.” Here we have our first ironic moment, as the decline in venture capital investment – 6.6% using the provided numbers – is all but the same in the slip in tech companies’s earnings once you strip out the harder than expected Apple landing.
Is a 6.6 percent decline in six months year-over-year investment a slump? No. And companies that deserve it are not having too much of a hard time raising cash, either, at least according to what I hear.
The article goes on to ding the industry for its slow pace of acquisitions and mergers, saying that although “there were a handful of large deals in July, the number of tech deals overall fell sharply from the same month a year earlier, from 341 to 240.” The month prior, ExactTarget went for $2.5 billion to Salesforce, and Google snagged Waze for $1.1 to 1.3 billion. Just in July. Oh, and Yahoo dropped $1.1 billion for Tumblr in May. So that’s three $1 billion+ acquisitions in under two months. Slump!
Massive decline in acquisitions and the like? The pace may have decreased, but deal flow appears healthy. Just because parts of technology aren’t going quite as gangbusters as before, doesn’t mean we’re in a slump.
“Meanwhile, tech companies going public remain rare,” O’Brien goes on to state. Others were writing the very opposite story in May, when Marketo and Tableau Software went public, both popping more than 50 percent on their first day. And for fun, here’s a list of tech companies that have gone public globally since Facebook did the deed just over a year ago.
And Box and Twitter are marching toward the public market. A $15 billion Twitter IPO would be a blockbuster event, and Box is generally thought of as a new wave of tech companies that are — cover your ears — serious.
We could be in the middle of a cooling-off period. But that doesn’t mean all momentum has stopped, and that tech is sitting back on its haunches licking Tesla-induced wounds. Things could change. But I don’t see enough evidence yet to convince us that the industry is in a trough.
But what about hardware, you might ask. Well, tell us, O’Brien of the Los Angeles Times: “Worldwide tablet shipments fell nearly 10% in the second quarter compared with the first quarter, according to an August study from IDC.”
According to the IDC tablet market data that I have in front of me, the tablet market grew 59.6 percent year over year in the second quarter of 2013. That’s, well, strong. There is a reason that we do not compare sequential monthly or quarterly data in products that are cyclical.
What else could be causing this theoretical slump? “In the U.S., others have pointed to the faster-than-expected collapse of PC sales,” O’Brien states. This appears valid, but we have to admit to ourselves that the PC market is hemorrhaging primacy in the face of smartphones and tablets, which are massive revenue drivers for OEMs around the world. So Samsung doesn’t make as much from selling PCs to you and me, but it is killing the smartphone market. So, I don’t think that this tells us much.
And the goddamn PC market hasn’t been healthy for some time. This isn’t new.
Cisco, as O’Brien quotes, namechecks the larger economy as a partial driver of its market difficulties: “This recovery is more mixed and inconsistent than the others I have seen.” So, the global economy is bad, which drags down technology spending, and thus adds friction to major companies. That sounds reasonable, and un-slumpish. A slow economy hurts all sectors, and to call out tech firms for being affected by it is a bit overly sharp.
Let’s keep going.
In a slump, you circle the wagons. Cash is short, wages are falling, innovation is perhaps slowing as costs mount and budgets are cut. People are forlorn and too much good work goes to waste as research spend shrivels.
Only that’s simply not happening, according to O’Brien: “Indeed, competition among rivals such as Google, Apple, Facebook and Samsung is too intense to throttle back on investing in innovation.”
What part of tech is slumping? Zynga, certainly, after the platform that it built its empire on lost to the rise of mobile gaming. Cisco, perhaps, but in its last set of earnings it reported an 18% gain in profitability. A few startups that I could name that you don’t know. Yahoo is struggling with flat revenues, but is really in a period of rebirth of sorts rather than slumping.
I think that we can say that most positive vital signs that we can see or put a finger on right now lean toward younger, more quickly growing firms, like Box. But that’s how it has always fucking been. Tech companies eventually lose — Wang — become zombies — AOL — or, as with Apple and Microsoft, utterly reform themselves. Apple by becoming the world’s preeminent consumer device company, and Microsoft ditching software and becoming a company that vends “devices and services.”
Tally the revenue and profit from private technology companies, if you could, and add that to the public sums and see if things are actually in decline. I doubt it. Are we living in the world in which Apple exploded past records every quarter? No, because other companies have appropriated some of Apple’s cool for themselves. That’s how competition works.
Slump? Try hiring a developer in any major market. Billion-dollar deals, impending multi-billion-dollar IPOs, mostly steady venture capital inflows, and double-digit stock market gains for the biggest tech companies are our current situation. That doesn’t mean there aren’t weaker spots in technology now than a year ago. But this, for the moment, feels more like a slight slowdown than the end of a golden era.
Top Image Credit: Christian Rondeau