November 18, 2022

Don’t Give Up on Tech

Way back in the 1990’s when I was managing capital for a corporate pension department, I used to enjoy reading the annual reports that companies, whose stock was held by our firm, would mail to us as a hard copy. One particular report that stood out to me was from the Microsoft company (MSFT) whose products, especially Office, have been central to my desktop organization to this day. What captured my attention though, had to do with the customary picture of the top executives and board members, that appeared in all annual reports. This particular picture had two differences that stood out. The first was the number of executives that weren’t wearing a tie, and the second was one executive holding a basketball. My takeaway, was that picture was an oracle into the future of technology, focused on skill over style and organization over fraternity. Now we come to 2023 and the narrative is to attack the major tech firms even as they have done more to enrich this country than at any time since the industrial revolution enriched the middle class in the 20th century. I bring this up, because those same major tech firms are beginning to layoff employees for the first time in recent memory, is this a good thing?

 Beginning last week, the release of Consumer and Producer price inflation data showed modest change lower. Likewise, the impact from the midterm elections still presently leaves the Senate runoff to complete the expectation, but in the meantime the House has modestly flipped, giving the markets some comforting gridlock. The war in Ukraine is currently an ongoing uncertainty, although its impact is diminishing as it fades from the global narrative. And Europe and China continue to harvest the impact of internal headwinds that are influencing any commitment to those markets, a difficult choice. Only the US has shown some promise, not necessarily reason for a happy dance, but as economic growth manages to show further weakness, and the macro inflation picture continues its trend lower, the overall picture needs to be closely watched.  

 The big change that I’m watching for will be the release of the Unemployment Data on December 2nd. In the meantime, yesterday’s data on Continuous Jobless Claims showed a modest increase, which is not surprising. As mentioned in the first paragraph, the tech layoffs, being explicitly advertised, have an impact that has the potential to alter, in my opinion, the frequent reckless perspectives from analysts. The first is while the numbers are not extreme, Amazon (AMZN) announced the layoff of 10,000 employees, curiously low since Amazon hosts over 1,500,000 employees globally.  The same can be said for Meta (META), which cut 11,000 people on November 9, and Twitter (TWTR), where 3,700 people lost their jobs on November 4. The number of employees being laid off, compared to the number of employees globally, suggests, in my opinion, that the changes are more focused on the reduction of expenses, rather than a response to pubic inflation. This is worth noting, because the most familiar tech companies have respectable Gross margins (>50%), and low Net margins (<20%). This is because their Operating expenses tend to be split between ongoing reinvestment and traditional compensation. And with the spike in growth of post pandemic hiring based on virtues such as community obligation and nearly invisible pay scales, even Google stated college diplomas were no longer necessary to apply.  And the salaries by most measure have outpaced previous generations, and between recent multiyear growth in wages and benefits, the tech balance sheets might be facing the first reduction in Operating expenditures, which could show a marginal increase in net profits. Neither a common occurrence for tech.

 Does that make the large cap tech sector a better investment than the analysts are suggesting lately? In my opinion, it’s compelling in relative value, but right now the evidence will be in the employment data and the earnings results, when they arrive. In the meantime, there is definitely good news in the air, and while the technical condition of the broad indexes suggests some correction lower from recent consolidation, the light at the end of the tunnel isn’t yet shining bright, but at least it’s starting to become visible. 

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