Saturday 29 October 2022

Lessons from the Big Tech crash

generic imageThe troubles of Big Tech might seem a world away for many tech sector business leaders. But there is a message for everyone from the share price crashes of the big names last week. (And if you missed last week's Big Tech nosedive, you can find the news here for Amazon, Meta, Alphabet/Google and the one that fared much better, Apple).

There are two factors influencing share prices now:

  • The first is rising interest rates, as central banks fight inflation. Higher interest rates mean a higher discount rate applied to future earnings when determining current value. The more adventurous and forward-looking the cash flows - and it doesn't come much more adventurous than monetising the metaverse - the more heavily the promise of those future cashflows will be discounted in a higher interest rate environment and the lower will be the value ascribed to the company's shares right now.
  • The second factor is how robust the cashflow forecasts themselves are, even those from current business. The macroeconomic environment is much tougher than it has been, with many economies teetering on the brink of recession. Investors are looking for more certainty on revenue streams, more evidence of control of costs and more clarity on profitability. As we saw with Big Tech, even the big names sometimes fail to convince their investors on these key points.

So the takeaway for everyone else is that communication is key. Make sure any new plans - be they metaverse-style or more mainstream - are well-pitched and fully-explained. And be sure to articulate how even regular revenue streams can be achieved in a tougher environment, how you consider the cost base of the business is appropriate and how you believe you can stay (or become) profitable.

Finance providers are taking a sharper pencil to business plans than in recent years, with many tech businesses in particular feeling the pinch of macroeconomic upheaval due to the longer-term nature of their cashflows. And it is likely to stay that way for the near future.

As Big Tech is discovering, getting (and keeping) stakeholders on board has never been more crucial.

Posted by Tania Wilson at '18:35' - Tagged: markets   macro