The white-collar recession is underway.
After nearly a decade of six-figure salaries, light jobs, and lavish office perks, Silicon Valley companies are finally cutting back. Nearly 90,000 tech workers were laid off in 2022 alone. This year hasn’t been off to a great start either. Amazon announced 18,000 job cuts on January 5.
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And now, SEC filings show that Microsoft is planning to lay off 10,000 employees by the end of the third quarter.
Things don’t get much better for those who (so far) have come out of their layoffs. Countless tech companies, private and public, have seen their valuations tumble over the past 12 months.
And now, the Financial Times reports that some panicked laid-off workers are “flooding the secondary market” with their shares in older companies. That means those valuations are likely to fall further.
Here’s what that means for your portfolio — and where you might want to move on.
Technology has a slump
Record low interest rates over the past decade have prompted many investors to seek out risky investments. Losing tech companies are perhaps the riskiest place to put this excess cash. Tech valuations soar as of 2020, allowing startups and tech giants to use their inflated stock as a way to retain talent.
Tech workers are overpaid in stock-based compensation. In fact, some companies like Snap and Pinterest paid up to 46% of their total compensation in the form of stock options. This has boosted the total compensation of tech workers in boom timesbut is now having the opposite effect as valuations plummet.
The Invesco QQQ Trust (NASDAQ: QQQ) — a fund that tracks technology stocks — has fallen 22.7% over the past 12 months. Meanwhile, private companies also saw valuations plummet as much as 80%. Employees of these companies are rushing to withdraw money on the secondary market, according to a recent Financial Times report.
Companies struggling to make a profit have been the biggest losers by far. The Morgan Staney Index of Losers has fallen 54% over the past year. Many of these loss-making companies have seen their valuations stabilize at pre-pandemic levels.
Looking ahead, some experts believe valuations won’t recover until the Federal Reserve pivots. interest rate strategy. Lower or steady interest rates could make risky tech stocks more attractive. However, that is unlikely to happen until the end of 2023 at the earliest, according to interest rate swaps.
Until then, investors should probably focus on the highly profitable tech companies that have been unfairly punished in this crash.
Adobe (NASDAQ:ADBE) has lost 31% of its value in the past year. The company underperforms the broader market by a wide margin. However, its underlying business is still going strong.
The company reported revenue of $17.61 billion for fiscal year 2022 — 12% higher than the previous year. And in September, the company acquired design platform Figma, expanding Adobe’s essential design toolset.
The company is also participating in the upcoming Artificial Intelligence boom by tracking how users use essential tools and integrating OpenAI’s tools with Figma.
The stock trades at a price-to-earnings ratio of 33.9.
Microsoft (NASDAQ:MSFT) is also joining the AI boom. The company was an early investor in OpenAI and now has access to ChatGPT for its Bing search engine. The integration could be completed as early as this year, which means the online search market is on the verge of disruption.
But none of this is reflected in the stock price. Microsoft has lost 21% of its value in the past year. It is currently trading at just 24.5 times net earnings per share.
The most profitable technology company in the world certainly deserves a mention on this list. Apple (NASDAQ: AAPL) delivered earnings per share of $6.11 for its most recent quarter — 9% higher than the year before. This year, the company is expected to launch a new set of virtual reality headsets and further move the supply chain from China to India.
Apple stock trades at 21 times earnings, making it an ideal target for investors in 2023.
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This article is for information only and should not be construed as advice. It is provided without warranty of any kind.