You’ll have seen the technology companies, on which Ireland depends, are going through hard times.
It’s been happening for almost a year. I wrote about it a couple of times (why Cathie Wood hit the skids, four stories about the market sell-off, the stocks that like rising rates) with my financial hat on. Rising interest rates are increasing the opportunity cost of deferred cash flows, that sort of thing.
Quarter by quarter, things have been getting worse for the technology giants. The following chart shows how the big Irish-invested technology companies’ share prices are doing relative to the S&P 500, the benchmark index for the entire US market.
In April, Meta was the only laggard. Now (apart from Apple), they're all at it. We're past the point where you can simply blame it on interest rates. What's going on in tech?
A new path
The first thing is that the pandemic screwed up the technology companies' forecasts. In 2020 and 2021, during the lockdowns, there was a spike in demand for digital products of many kinds. Technology companies saw enormous growth. Not unreasonably, they extrapolated that growth forward. They told stock market investors to expect more growth in future. But it turns out that the pandemic trend was temporary, not permanent. The following chart shows Meta's revenue, but it could be a stand in for any big technology company.
Looking at skyrocketing revenues, and stock prices, technology firms went on a hiring spree. Meta and Alphabet were already huge companies in April 2021. Since then, they've grown headcount by 33 and 38 per cent respectively — 47,000 employees for Alphabet, and 24,000 for Meta. Note that headcount has kept growing in recent quarters, long after it was clear that the slowdown was happening.
Now these companies, whose whole culture is built around growing quickly and coddling employees, may have to start sacking employees and improving efficiency. It won't be easy.
Apple the bully
There's a feeling that because these companies are big and rich, that they are all-powerful. But competition among them is ferocious.
Apple has been putting the screws on the rest of the technology industry. It's no coincidence Apple's share price is looking relatively good.
The big thing was a new Apple policy called App Tracking Transparency (ATT). Introduced in the middle of last year, ATT sharply reduced the amount of information Apple shared with advertisers about what iPhone users were doing.
Previously, Apple allowed advertisers to know when you had bought something on an iPhone. For advertisers, this is highly pertinent information. It's a key number for calibrating digital ad spending.
Now, advertisers have to guess whether or not people are buying. It makes their job much harder. And it makes their business much less valuable. Apple's share of the global phone market is 21.8 per cent, according to Statista, but it's the richest 21.8 per cent. Apple customers are an outsized share of e-commerce customers.
Meta has been hit hardest by this. It forecast ATT would cut revenue by $10 billion, or 9 per cent, this year. Snap, too, has attributed a fall in revenue to ATT. Even Alphabet, with its own operating system, has seen a slowdown in YouTube's growth, coinciding with the introduction of ATT.
At a stretch, you could even blame Apple for Meta's seemingly insane, self-destructive bet on the metaverse.
Meta expects to invest a total of $70 billion in the metaverse, which would be one of the biggest bets by any company in history. Spending on the metaverse will reduce earnings by two-thirds this year, and for the foreseeable future.
You may have heard that the metaverse, at the moment, isn't up to much. Why is Meta's all-powerful CEO Mark Zuckerberg doing this?
Meta today is a product company. Its products are Facebook, Instagram and WhatsApp, and they operate on iPhones and Android phones. Zuckerberg does not like this arrangement.
Zuckerberg wants Meta to be a platform company. He wants it to have its own connection to customers, as Alphabet has with Android, Apple has with its devices, and Amazon has with its warehouses. He doesn't want to be at the mercy of Apple or Alphabet.
Zuckerberg has form. Ten years ago, he tried and failed to build Facebook into a platform with the Facebook phone. That didn't work out. The metaverse is his second attempt.
Beside the slowdown in revenue after the pandemic, and ATT, and the excessive hiring, and the metaverse stuff, Meta has another very serious problem: TikTok. TikTok is where the kids spend their time these days, and there's not much Meta can do about it. Meta has started to TikTok-ize Instagram, and will probably continue down that path. But TikTok keeps on growing.
Intel's wrong turn
Intel is another of the losers from the rise of Apple. In 2005, Steve Jobs asked Intel to manufacture chips for its new mobile device, later known as the iPhone. Apple wouldn't pay more than a certain price and Intel — which was by far the dominant chip maker at the time, and seeking to protect its margins — turned it down.
That was the start of Intel's troubles. Not only had it missed out on the iPhone bonanza, but a Taiwanese Rival, TSMC, got the business instead. TSMC used the volume from iPhone chips to justify investment in further manufacturing, which resulted in it winning the rest of the smartphone market, which justified still further investment, until TSMC controlled 53 per cent of the global microchip manufacturing industry, and the best TSMC-manufactured chips leave Intel's in the dust.
For Intel, breaking out of this cycle will be staggeringly expensive. Catching up to TSMC will presumably require investing even more than it.
The good news for Intel is that it's strategically important to the US government. The west needs cutting-edge microchips, and reliance on TSMC is looking increasingly risky. That's why Congress passed the CHIPS act last summer, promising nearly $53 billion for US-based microchip manufacturing.
That sounds like a lot — almost as much as the metaverse! — but it has so far to go to catch up with TSMC, which is forecast to invest between $40 and $44 billion in capital expenditure this year, almost twice Intel's total.
From the perspective of Leixlip, I wouldn't be too worried. Intel won't be allowed to fail. It announced earlier this year a $12 billion investment in Leixlip. The CHIPS act will be a shot in the arm to Intel's capital expenditure generally, and though it's not targeted at Ireland, Leixlip should benefit.
The technology industry as a whole will be fine in the end. But specific technology companies – even the biggest ones – shouldn't be too sure of themselves. Quite a few of the big technology companies that invested in Ireland before 2000 didn't survive that downturn.