Tech Stocks Face A New Risk in the Coming Months

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Tumbling technology valuations have consequences.

The selloff is pushing management teams to rethink their old ways of chasing growth with profligate spending.

The new round of belt tightening threatens to cascade into a bigger problem—a slowdown in enterprise technology spending. Along with a rapidly fading global economy, it could drive another leg down in the industry’s earnings outlook.

Since last month, well-known technology investors have been waving the caution flag, telling executives to act quickly in the tougher market environment. One of the largest venture-capital firms a16z chimed in on Friday and told start-up founders they should reassess their financial situation and adjust spending plans, accordingly.

Several companies have taken aggressive action.

Robinhood

(ticker: HOOD) started it off in late April by announcing it was laying off 9% of its workforce to improve operational efficiency. On Wednesday, Reuters reported 

Meta Platforms

(

META

) management has told its staff to expect more cutbacks because it could no longer afford certain projects. A day later,

Twitter

(TWTR) revealed it had fired two senior executives, paused hiring for most roles and plans to reduce cloud computing expenditures. Finally,

Uber Technologies

(UBER) has also emailed its employees to cut marketing and other expenses this month.

The cutbacks are a clear shift in behavior and could mark an important inflection point. If major technology companies like Meta, Twitter, and Uber are turning off the spigot, other companies could soon follow suit.

That’s going to be problematic for the technology sector. With e-commerce and consumer electronics sales already sputtering, enterprise spending has been the one area that’s held up. In the latest reported quarter, all three major cloud-computing units inside

Amazon.com

(AMZN), Google, and

Microsoft

(MSFT) posted impressive growth. Even enterprise-focused

IBM

(IBM) generated first-quarter revenue growth that topped expectations.

But a wave of budget reductions this month, means other hardware, software, and services companies could see less revenue. And that could spark a negative feedback loop, driving wave upon wave of further cuts.

The absolute dollar figure for corporate technology spending is massive, and the market has elevated expectations. In early April, research firm

Gartner

said it projects global IT spending to rise by 4% this year to $4.4 trillion. Those numbers are likely stale after this week. And any reduction in the market size would have a large impact on a dollar basis for the industry.

Compounding the issues are the increasing signs the global economy is deteriorating. Asustek, a large PC maker, said last Wednesday that higher energy prices in Europe were significantly impacting its sales by squeezing the spending power of consumers, resulting in higher inventories. In his latest update on Friday, Twitter CEO Parag Agrawal said the industry is facing “a very challenging macro environment.”

Wall Street is getting worried. On Friday, Wedbush analyst Daniel Ives wrote that investors have already started to anticipate significant cuts to earnings estimates for tech companies. “We believe these stocks are pricing in a hard landing with fears abound,” he wrote.

Of course, it makes sense for each company to be prudent with their spending. But the industry as a whole can’t cut its way to prosperity.

The prospects for the technology sector have already deteriorated. Investors could be in for a continued rough ride as the earnings numbers come down.

Write to Tae Kim at [email protected]