As equity markets tumble amid worries about a pickup in new COVID-19 cases, it's worth remembering just how much some tech companies have to lose if economic activity doesn't see a fast, sharp and sustained rebound.
Certainly, the COVID-19 pandemic has already hurt tech spending in a number of areas. Notable ones include new software purchases by SMBs and companies in industries such as travel, retail and hospitality; online ad spending by the likes of automakers and online travel agencies; and smartphone, automotive and industrial chip purchases.
But with that said, many tech companies would be facing much worse top-line pressures right now if not for a few mitigating factors.
First, there's the impact of giant fiscal stimulus efforts -- everything from stimulus checks to PPP loans to extra unemployment insurance benefits (set to end in July). And while another stimulus bill might end up being passed, there's still a lot of uncertainty about how large and comprehensive it will be.
Second, for many companies, weakness in areas such as SMB software spend or automotive chip purchases has been offset by lockdown-driven strength in areas such as collaboration software purchases by major enterprises, cloud infrastructure usage and greater chip demand within end-markets such as notebooks and cloud servers.
Some of this strength could sustain into the second half of the year, but as companies have cautioned, some currently-strong markets are also likely to cool off if macro pressures continue after an initial period of lockdown-driven buying has ended. And some (though not all) of it is likely a pull-forward of demand growth that have taken place over the next couple of years.
Third, and perhaps most importantly, many businesses have avoided reducing their spending too much on the assumption/hope that macro conditions will quickly improve. Chip suppliers such as Texas Instruments (TXN) have hinted at this when talking about how recent ordering activity from clients doesn't necessarily track end-market demand, and so have online ad players such as Facebook (FB) when cautioning that the demand stabilization they've seen (following an initial plunge) isn't guaranteed to last.
Of course, none of this has prevented many of the tech stocks that are facing meaningful top-line pressures from rocketing to new highs, or at least approaching their old highs. Optimism fueled by low interest rates, stimulus measures, lockdown-driven demand boosts and initial reopening efforts, together with a major spike in retail trading activity, has helped not just the likes of Zoom (ZM) and Netflix (NFLX) to make new highs, but also companies such as Facebook and Tesla (TSLA) .
As a result, even if one happens to be very upbeat about the long-term potential of some of these companies, the current macro and valuation backdrops make for a far-from-ideal risk/reward scenario in the near-term.