TMT Sector Update

 

Technology sector headlines over the summer have been dominated by the trade dispute between the US and China, uncertainty in the semiconductor industry, a large number of tech IPOs, regulatory cases against Big Tech, and the ongoing growth in cloud.

Cloud, data centers, and 5G connectivity remain the largest investment categories spoken about, with cloud growth driving revenue growth across technology companies. Less talked about are cognitive computing and automation tools, which are now under a spotlight for vastly improving customer insights and increased efficiency. The advancement of digital tools has allowed companies to better analyze data and gain insights on not just customers, but competitors. Efficiency is also growing in the bankruptcy process and the restructuring afterwards as tech companies play a larger role in assisting companies. IT strategies around cloud computing and data analytics are being increasingly used to cut costs and streamline processes.

Antitrust investigations continue in the US, with the House Judiciary Committee asking for a variety of documents, including emails between executives, financial statements, and information about competitors, market share, mergers, and key business decisions, from Big Tech executives. These executives include Amazon’s Jeff Bezos, Facebook CEO Mark Zuckerberg, Apple CEO Tim Cook, and Google’s Larry Page, Sergey Brin, and Eric Schmidt. It’s very unlikely these companies will give such access to the House Committee, so negotiations over the documents requested are likely to commence soon.

Several other investigations are underway against Big Tech, including investigations from the Justice Department, the Federal Trade Commission, Texas AG Group, and NY AG Group. However, any US action against Big Tech is likely years away considering the large ramp-up in spending such companies have put in place to influence antitrust discourse and that any sanctions against the companies must be imposed by federal or state law enforcers, not Congress.

Despite that, technology companies might not wait for the US to act. Microsoft CLO Brad Smith recently came out and said: “The laws around the world are going to change, and because technology is so global, American companies will adopt a new approach even if the United States Congress does nothing.” His call for regulation is skeptical as any laws geared to make internet platforms more accountable for their content pose a greater threat to competition than Microsoft

On another note, 2019 has been an extremely active year for tech IPOs. Despite Uber and Lyft’s disappointing performances, top tech IPOs have outperformed the S&P 500 this year at a 67% gain including Cloudfare which jumped 20% on its first trading day this Friday. There are many caveats in this comparison, including the facts that it does not factor in market caps, lock-up expirations, and most notably, the necessity of Beyond Meat in the IPO basket, which is up 524% since its market debut. Following Beyond Meat’s stellar performance is videoconferencing company Zoom, up 120%, and security vendor CrowdStrike, up 91%. The biggest laggard is Lyft, down 36%, followed by Uber, which is down 26%, and e-commerce company RealReal, down 15%.

From a macro viewpoint, technology companies continue to expand into emerging markets, swallowing currency headwinds and highlighting the risks of continued geopolitical uncertainties, including the US-China trade dispute, unpredictability in China, and declining smartphone demand. Cloud computing continues to be the center of attention in the tech industry with significant margin improvements, followed by AI computing, data centers, cybersecurity solutions, 5G connectivity, and IoT. 

By Gloria Ghita - TMT Director, Baruch IMG