Does history repeat for tech companies that have strong exposure to work-from-home, play-from-home and shop-from-home trends as COVID cases rise again?
That might be the million-dollar question as markets waver amid an uptick in COVID case counts and the onset of colder weather in both the U.S. and Europe. And it's not an easy one to answer.
To be sure, the Q3 results and Q4 guidance shared by many tech companies over the last three weeks -- from chip companies, to e-commerce firms, to cloud software firms, to online ad sellers -- hardly suggest that it's panic time.
There is some clear weakness right now in on-premise enterprise hardware and software spending. And the Q3 user/subscriber numbers shared by companies such as Netflix (NFLX) , Facebook (FB) and Twitter (TWTR) suggest there has been some leveling off (though by no means a major drop) in usage for things such as streaming and social media services, following major jumps this spring.
But otherwise, trends still look favorable. Consumers remain avid buyers of electronics and tech hardware; businesses are still spending heavily on cloud apps and services; a lot more shopping is still taking place online than was the case a year ago; and online ad spend has rebounded in a big way.
Moreover, all of this is still happening in the absence of any fresh stimulus. Should additional stimulus arrive ahead of the holidays, that would add more fuel to the fire.
Also: If higher COVID cases, new lockdown measures and colder weather in the U.S. and Europe once more lead consumers to spend more time at home -- and cause additional declines in travel/hospitality spending -- various tech companies could see a fresh demand uptick.
That's the bull case for tech right now. The bear case? Tech companies benefiting from the aforementioned spending trends might not be as immune from macro pressures this time around, should there be additional weakness in the coming months, and tech stocks are still generally pricing in a lot more future growth than they were in March and April.
Back in July, I made the case that we could see larger layoffs and spending cuts this year among companies that are seeing top-line pressures in the current environment -- not just travel/hospitality firms, but companies in industries such as media, financial services, etc. -- if there isn't a fast economic recovery. In recent weeks, we've begun seeing this scenario start to play out, as companies such as Disney, ExxonMobil, Allstate, Boeing, WarnerMedia and Wells Fargo either announced or were reported to be prepping major layoffs.
In addition, with no new stimulus having yet arrived -- and with none potentially arriving before 2021 -- many of the firms in badly-struggling industries that have survived to date might find it harder to stay in business or avoid major layoffs as sales remain poor or weaken further over the course of this winter.
It goes without saying that all of these companies, whether just seeing moderate pressures or at risk of bankruptcy, don't exist in a vacuum. They spend a lot of money on tech products and services, and so do their employees. One can't simply assume that cloud app developers, online ad platforms and e-commerce firms (just to give a few examples) will be unscathed if corporate bankruptcies and/or mass layoffs rise significantly for large parts of the economy.
And as Fastly (FSLY) and Twitter can vouch, markets aren't in a forgiving mood right now if a high-multiple company shares news that puts a dent into a growth narrative that helped a stock blast off. Indeed, as Etsy (ETSY) and Shopify (SHOP) can vouch, even a pretty strong earnings report isn't necessarily quite enough to keep a richly-valued stock from seeing some selling pressure right now, particularly if a comment or two about near-term uncertainty is also provided.
In such an environment -- one where there's still a lot of good news, but where certain risks are now starting to loom larger -- I think there's a good case for being selective about how one chooses to deploy cash during a market correction, as well as for making sure that a company's valuation provides some margin of error in the event that business trends a little differently than expected.