In the first part of my 2 part series blog, we explored the Technology trends impacting our company, HCL Technologies one of the worlds leading global IT services firms and how its competitors are navigating an extremely volatile market.
We concluded that in the medium and longer term there are numerous changes apace within the Tech sector from Cloud services, IT Services and Digital services. The medium term trends include a change in the way IT companies innovate and partner, new digital ecosystems, a shift in culture to more agility, use of AI, and a skills shortage in European companies.
We also know that in the longer term customer expectations are shifting to more time saving and accessibility to their banking services. This has led to a shift in expectations to the Cloud and deployment of newer technologies like AI, ML and Digital with Challenger banks and niche players consuming microservice via APIs. There will also be growth and consolidation among the Platform and Born Digital players Google, Apple, Facebook, Amazon, Baidu, Alibaba. with Regulatory drivers like PSD2 and GDPR keeping access to customer data and its use in check.
In the second and final part, I would like to look at current Macroeconomic conditions and what is in store for the largest Technology companies and Start ups.
Macroeconomic outlook, Global markets protectionism and the rise of Chinese Tech
- In terms of Global markets, no doubt with U.S. / China trade war and Brexit, protectionism is on the rise, with ECB warning that growth in the Eurozone economy is slowing with Germany and France stagnating and Italy’s budgetary challenges with the EU stemming from its greater indebtedness and political pressures.
- In this backdrop, Huawei has come under scrutiny by the U.S. for 5G wireless networks and becoming a security threat leading to banning in the U.S., Australia and New Zealand. Despite this, Huwaei has worked closely with U.K’s GCHQ National Cyber Security Centre which has been vetted in its cyber security lab with Defence Secretary Gavin Williamson and Digital Secretary Jeremy Wright having urged caution over China’s involvement in the U.K.’s 5G programme.
- To add to this mixed news, Liam Fox, the international trade secretary praised the recent BT China deal as an example of the fruits of close cooperation between the UK and Chinese governments which has resulted in BT securing licenses in China for BT. The Chinese licenses give BT a domestic VPN license and Internet Services provider license. The good news for BT was accompanied with the public announcement by the department for Digital, Culture, Media and Sport that it is conducting a review into the market and Chinese ownership of British IT networks.
Let’s now turn our focus to the world’s most valuable Tech companies and see what the stock markets are indicating.
Forecast for Top Tech’s - FAANGs
FAANGs – Facebook, Amazon, Apple, Netflix, Google
2019 has got off to a testing start for the world’s most successful Technology companies. The FAANGs group collectively shed more than $1trillion in market value from their record highs in 2018.
Silicon Valley has faced a string of personal harassment scandals, employee protests, consumer fatigue. JP Morgan analysts state that Public tech companies are trading at their historical lows with the price to earnings (P/E) ratio dropping by more than 60% since beginning of 2017. The premium once achieved maybe steadily coming to an end.
High profile CEO’s of gigantic companies like Jeff Bezos leading Amazon and Elon Musk at Tesla respectively, have shown that their actions and words can influence the share price significantly. We have seen this with tweets from Elon Musk about taking Tesla Private and with Jeff Bezos’s personal life coverage in the news. Here is what analysts think will be the impact to individual FAANGs stocks:-
- Facebook lost favor following the data analytics privacy scandal in February 2018. Since then, the company and its CEO, Mark Zuckerburg, have faced considerable regulatory and political scrutiny in both the U.S. and Europe. With the GDPR regulations going live in May 2018 after the breach, it managed to escape far more damaging fines of 4% of its global revenues. A great example of the regulatory threat is Google, its competitor, which received a $50m fine from the French regulator in January this year. User saturation, including its sister products, such as Facebook Messenger and WhatsApp meant growth coming from its other Facebook product, Instagram. Analysts think Instagram may well be spun off. Though Facebook is banned in China by the Communist party, it has several billion dollars tied up in advertising in the Chinese companies and their intermediaries.
- Whilst Amazon’s stock fell 26% from its record high of 2050 on Sept 4th 2018 its growth drivers include e-commerce expansion into large retail verticals such as apparel and groceries. Amazon’s Cloud computing service AWS has also become a dominant Cloud player and a rosy outlook expected to be spun off. Despite Amazon being in first place with Microsoft in 2nd place and Google in 3rd place the share of the Cloud computing market is still very fluid and Google in particular is still battling to grow its market share and challenge the status quo.
- The market witnessed Apple the iPhone maker having a slump in Sales in the last quarter of 2018. This was from a record high of 233.47 on October 3rd 2018 and subsequently fallen 35%. Part of this general malaise in the U.S. stocks are macroeconomic with the rise to U.S. interest rates and the Trade war between China and U.S. Tim Cook, CEO of Apple has blamed the policy of offering battery replacement for older models and this may explain why it is selling less than 200m phones for the first time in 4 years. Challenges to Apple include iPhone’s falling market share in India. Expectations from analysts are that Apple will become more like a services company rather than a hardware supplier it started out as. Apple is focusing on services and wearables.
- Netflix is in a leadership position in streaming services. Despite having strong renewal rates its share price has dropped 40% from its peak of 423.20 reached on June 21, 2018. Netflix may see its position challenged by Disney’s streaming service due to be released late in 2019 with AT&T also expected to be a threat.
- The final member of the FAANGs group Google with its parent Alphabet is facing regulatory scrutiny for the role its product YouTube played in alleged fake news. That said, Google still has the lion share of advertising revenue in the search engine market. However, whilst this may be true, its competitor Amazon in digital advertising show how Consumers are turning to e-commerce for their product searches as an alternative to the Google search engine. Another notable area of progress for Google is in its early stage investment in cloud. Whilst it is still playing catch up with rival Amazon’s data storage service, industry expectations are that Google will embrace this public cloud opportunity benefiting from greater security of data, reliability and scalability.
It’s clear to see that the biggest challenge the largest Tech players face are its competitors eroding away their uniqueness by copying their products e.g. BMW making electric cars like Tesla and Apple iPhone facing Android phones. Unless they can turn to further innovation, this is an inevitable threat of competition in existing markets versus creating new markets.
Finally, the most interesting developments to watch will be the prospects of new Start-ups. In the past 5 years we have seen a tremendous growth in Venture capital backed unicorns within the Tech sector. We have witnessed firms like Uber, Lyft, Spotify and Dropbox have grown in value without making any profits. Here are some predictions of what to expect.
Tech Investment outlook in 2019 for start-ups and unicorns
There are expectations that Unicorns like UBER valued at $100bn will go to an IPO with Lyft, Slack and Airbnb to follow closely behind because of risks of recession and volatile markets and a wish to crystallise their funds. The big question is if the markets will sustain their valuation on converting from Private to Public ownership.
Certain Pundits (Rana Foroohar, FT) think Markets are inflated and a Tech bubble exists with too much money chasing too little value. What we know is that since 2014 the number of starts ups have proliferated and the number of IPOs have fallen.
We also know that Technology tools have made it far easier to start up than previously but that becoming successful is much more expensive because of an arms race to build the next $1bn capitalised unicorn.
Start-ups have been trying to accelerate their growth trajectory by rapid expansion often loss making and with no clear path to profitability.
Low barriers to entry mean many entrants to the market are competing to gain market share facilitated by spending as much as possible. The size and scale of funding has also been attractive to say no to from billion dollar venture funds with Sequoia raising $8bn seed fund and Softbank raising $100bn fund. The growth of large funds has resulted in bidding up the value of start ups and leading to a bubble in IPO markets. Public companies have also suffered from disrupters such as Airbnb and Uber disrupting the Hotel and Taxi industry.
Whilst the large valuations in the guise of growth may seem to be inflated currently its sustainability is bound to be severely tested in the markets this year and will be interesting to watch given the wider political and macroeconomic outlook for 2019.