Opinion

Tech’s Reckoning Is Upon Us

Inflation? Rising interest rates? The lingering pandemic? The Russia-Ukraine conflict?

All of the above explain the tech stock dive. After the very good times in 2021, the reckoning for tech valuations, as well as start-up funding by venture capitalists and cryptocurrency, is officially here, with all plunging into the Mariana Trench of finance. The only question is whether it is 2001 (the Web 1.0 crash) or 2008 (the Web 2.0 crash) or some new web3 crash.

The canary in the coal mine is how those typically sunny venture capitalists’ Twitter accounts have flipped to earnest talk of “market corrections” and “company right-sizing.”

Most of the big company stocks have been in the tank, with even solid businesses suffering over the past month — Apple is down about 15 percent; Alphabet over 12 percent; Airbnb close to 28 percent. Weaker ones have seen a more precipitous decline; Netflix stock has lost half its value since mid-April.

Oddly, the one staying relatively stable now is Twitter, which spent years being lapped by other Silicon Valley firms. No doubt it’s being propped up by the $44 billion takeover bid by Elon Musk — and yet even that acquisition is in now doubt since the collateral for the purchase rests with his fortune at Tesla. Like its peers, Tesla’s bottoming out, its stock having dropped nearly 30 percent in the past month.

That might make the $1 billion walkaway fee much more attractive to Musk, who could come back when Twitter inevitably craters post-breakup. In the starkest of terms, he should not pay $54.20 a share for the troubled company (it was trading around $45 a share on Thursday), no matter how much he likes to troll.

Oh, but that is not all in the techopalypse.

As The New York Times noted: “The number of people and groups trying to unload their start-up shares doubled in the first three months of the year from late last year,” citing Phil Haslett of EquityZen, which helps private companies and their employees sell their stock. Share prices of some unicorn start-ups have fallen as much as 44 percent in recent months, The Times wrote. “It’s the first sustained pullback in the market that people have seen in legitimately 10 years,” said Haslett.

That has also been accompanied by a significant drop in venture funding due to a fast fading I.P.O. market.

And what about cryptocurrencies, which were booming after a slide last summer? Bitcoin, the most stable, rose to around $68,000 last November, but has fallen off a cliff to just above $28,600 today. The crypto trading platform Coinbase is another big loser, down over 60 percent in the past month. Meme stock catchphrase HODL (“hold on for dear life”) might actually cost you your life, your financial one at least.

As tech’s gloomiest venture capitalist, Bill Gurley, who is frequently right and never in doubt, wrote in April on Twitter: “An entire generation of entrepreneurs and tech investors built their entire perspectives on valuation during the second half of a 13-year amazing bull market run. The ‘unlearning’ process could be painful, surprising and unsettling to many. I anticipate denial.”

And he also noted: “Revenue & earnings quality matter.”

He’s wrong on that last point — at this moment, nothing matters, so it might be a good idea to sit very quietly and think hard about the growth-at-any-cost mantra that has illuminated tech for the past 13 years. No less than the chief executive of the size-obsessed Uber, which Gurley financed, was out this week preaching restraint. “We have to make sure our unit economics work before we go big,” said Dara Khosrowshahi in a note to his employees. “We will be even more hard-core about costs across the board.”

As it turns out, there is always a cost.

4 Questions

Tripp Mickle recently joined The New York Times to cover Apple, after nearly eight years at The Wall Street Journal. He has a book out this month, “After Steve: How Apple Became a Trillion-Dollar Company and Lost Its Soul.” I’ve edited his answers.

When Steve Jobs died in the fall of 2011, many thought Apple wouldn’t be able to thrive without him. Of course, the opposite has come true as Apple has become one of the most valuable companies on the planet. To what do you attribute that?

Tim Cook and the rest of the Apple leadership team deserve a great deal of credit for proving the skeptics wrong. Early on, Cook did an admirable job of keeping together the team Jobs assembled and encouraging it to find a new way of working. He empowered Jony Ive, Apple’s design chief, to lead the development of the Apple Watch. The project gave birth to AirPods — and a nearly $40 billion annual business. It also alleviated, for a time, questions from customers and Wall Street about whether Apple could create another new product category.

Perhaps more important, Cook increased Apple’s financial discipline, controlled costs and found a way to squeeze more sales out of the iPhone through apps and subscription services. The profitability of that business increased Apple’s value in the eyes of Wall Street. Essentially, Cook recognized that the iPhone had made Apple more powerful than any cable or wireless company in history because its signature product, as Oprah said, was in one billion pockets.

Apple has turned in consistently spectacular financial results. Who deserves the credit: Tim Cook or the iPhone itself?

The two are inseparable. When Tim Cook stepped in as chief executive in 2011, Apple was shipping 20 million iPhones a year. Today, it ships 200 million. It has done so without a major slip-up — and even benefited from a calamity at rival Samsung, which was challenging Apple until exploding Galaxy phones caused its business to founder.

Meanwhile, it was Cook who laid the groundwork for the iPhones to take off. He negotiated the signature deal with China Mobile that made the iPhone available to a potential 700 million new customers in China. He later identified and leaned into the iPhone’s power as a distribution system to sell more services.

In much the same way Jobs expertly marketed Apple devices to customers, Cook expertly promoted the potential of services to Wall Street, assuring investors in 2017 those sales would more than double in the coming years. In typical Cook fashion, he delivered on that promise ahead of schedule.

Apple seems to be firing on all cylinders now, so what are the biggest challenges it faces in the future, leaving out the stock market declines of late?

China. China. And China. In a world of rising geopolitical tensions and deepening awareness of the plight of Uyghurs in Xinjiang, Apple is likely to face pressure from United States lawmakers, employees and customers to diversify its supply chain and begin manufacturing products at scale outside China. Doing so won’t be easy. Apple has struggled with initial efforts to spin up product assembly in India, where poor workplace conditions at a Foxconn plant required an investigation.

Apple also faces trouble in the West. Regulators and lawmakers in the United States and Europe are both scrutinizing the 30 percent cut it takes of App Store sales. New rules or penalties could impair that all-important services business that Cook built.

What are the sectors Apple needs to move into and what is the overall timeline for the next big thing for the company?

There’s a principle that business leaders refer to called the law of large numbers. Essentially, once a business’s sales swell, a company has to find an even bigger business to move into in order to deliver sufficient revenue growth. Many years ago, Apple recognized that it had saturated the consumer electronics industry and would have to jump into new and enormous sectors to find growth. It has looked at health care, transportation and energy. Its foray into health has delivered limited sales upside so far beyond the Apple Watch.

The most promising — and confounding — opportunity is probably in transportation. The company began working on a car in 2015 and wanted to release it in 2019. But it has been stymied by differing opinions internally about what it should be. Should it be an electric vehicle that competes with Tesla? Or a fully autonomous vehicle that leapfrogs others in the market? It is still sorting through those differences. The latest projections are that it would launch a car at the earliest in 2025.

The F.T.C. Gets Its Man — Will It Get Going?

Lina Khan, the Federal Trade Commission chief who’s been under some pressure to get things moving there, finally got a turbocharge this week with the confirmation of Alvaro Bedoya, a lawyer and online-privacy expert, as the third Democrat on the commission’s five-member governing board. It gives Khan the majority she needs to push through a series of Big Tech actions she has talked about.

Taking on technology firms’ power was the hope behind her appointment by President Biden; the 33-year-old Khan created big waves due to her wunderkind legal reputation on antitrust — her student law review article taking on Amazon was a sensation when it was published in 2017. Now Khan must deliver on that promise by finding ways that can pass legal muster to throttle companies like Meta, Alphabet and Apple.

She could focus on a backward attempt to unwind Amazon’s $8.5 billion acquisition of the Metro-Goldwyn-Mayer studio (tough) or Microsoft’s pending nearly $70 billion purchase of the video game giant Activision Blizzard (tougher) and she also has her eye on a range of ways to control algorithms and protect consumer’s privacy around data (not clear if this is even in within the F.T.C. purview).

In a January “Sway” interview, Khan said she had a “fierce sense of urgency” about her tenure and a desire to get going on enforcing antitrust. “The key task for antitrust enforcers is to ensure that we have a marketplace where firms can compete on the merits,” she said. “And so really, the goal of the enforcers is to create a marketplace that’s competitive, that’s open, that’s fair.”

Now that she’s got her majority, the clock is ticking louder than ever for Khan.

Truthiness

One assumes in the end that despite his protestations otherwise, Donald Trump won’t be able to resist trying to find a way back onto Twitter, per Elon Musk’s invitation to him this week — exactly as I predicted. But Trump has a diminished social media reputation due to his, so far, limp postings on his own competing Truth Social service. And, sources tell me, he’s up against legal and contractual problems if he tweets rather than “truths,” the in-house word for posts on Trump’s service (not a whiff of irony there).

But news of the possible lifting of Twitter’s permanent Trump ban — a big if since Musk is not now and may not ever be the owner of the service — gave Truth Social’s chief executive, Devin Nunes, a chance to dunk on Musk, albeit politely.

“We’re very supportive of what Elon is saying,” Nunes told Fox News. “The question is, will he actually be able to accomplish what he’s saying, dealing with all the employees, dealing with all the algorithms? But the goal has been for us, for President Trump, to give the American people their voice back, and open the internet back up, and that’s what we’re trying to create.

“Truth Social is wide open right now in the Apple App Store, and you don’t have to ask anyone’s opinion. There’s no Big Tech tyrant that can cancel you, you don’t have to go to a billionaire to ask permission. You’re let on: Democrat, Republican, whoever you are. And we’re not going to censor you for political speech, so we are accomplishing what the mission of our company is, which is to get this internet open back up.”

This is where we are, folks: fighting over Trump’s inane online utterances — which is just how he likes it.

Related Articles

Back to top button