Not that there was much doubt at this point, but: We are officially in a recession.
The U.S. economy entered recessionary territory in February, The National Bureau of Economic Research declared on Monday, formally bringing to an end 128 consecutive months of economic growth.
Of course, this has not been an ordinary recession, with swaths of the economy closed and millions of people working from home, some indefinitely. Technology has been a bright spot amid the turmoil, with investors piling in to tech giants and software firms as a safe harbor.
"Within TMT [technology, media and telecom], the reality is better than the broader market and economic environment, at least in some parts of technology," said Ted Smith, partner at investment bank Union Square Advisors.
Now with one full quarter of earnings in the can, investors have a somewhat clearer picture into what this recession means for tech.
1. Lower Growth, But High Confidence
Since the beginning of this recession -- and the pandemic, needless to say -- we've seen examples of software firms, like Zoom (ZM) - Get Report or Twilio (TWLO) - Get Report, blowing away growth projections as many businesses went virtual practically overnight. Other, more established players such as Salesforce (CRM) - Get Report reduced their growth projections for the year.
There's a spectrum of impact across the tech sector, Smith added. "Generally speaking, the impact on tech we’re going to see is a reduction in overall growth across the board, but -- unless we have a massive second wave of COVID-19 -- it doesn’t feel like tech is going to suffer in the same way we’re seeing in the broader economy." And recent momentum in the market, with the Nasdaq index in positive territory this year despite the pandemic and recession, suggests steadfast investor confidence in a robust tech recovery as the overall economy rebounds.
2. Tech Giants Expand Share
Companies of all sizes tend to cut back on more speculative, longer-term investments during a recession. And that is probably true even among some of the wealthiest tech firms: Alphabet, for example, said in April it was "recalibrating the pace and focus of [its] investments" in response to the rocky economic environment. Spending on big, cash-burning bets may drop in a recession, but some cash-rich tech giants may take the opportunity to expand their empires by acquiring smaller firms.
"If you take Microsoft for example, they're in a pretty good spot and have a gigantic cash position," said Sean Dempsey, co-founder at Merus Capital. "They might take this period of time to gain market share" in key growth areas like Azure. Two weeks ago, Microsoft (MSFT) - Get Report announced its acquisition of Softomotive, an automation software firm, and other dealmaking could follow during the recession. Other tech giants, namely Amazon (AMZN) - Get Report, are plowing profits back into core business segments to solidify and expand their leadership position.
3. IPOs Come Back to Life
As COVID-19 loomed over the markets this spring, tech IPOs were put off for a brighter day. There were just a handful of total U.S. IPOs in April, and some of the largest expected offerings -- such as Airbnb and DoorDash -- were likewise delayed. The IPO pipeline could look a lot different by the third quarter, said Duncan Davidson, managing partner at Bullpen Capital.
"The market is hungry for product; you see an increasing appetite for new properties," Davidson said. ZoomInfo, in the first U.S. software IPO since the COVID-19 outbreak, rose more than 70% in its first day of trading last week. The fall will likely bring more offerings to investors looking for place bets on tech.
However, investors are more sensitive these days to fundamentals -- the era of "fake tech," marked by exorbitant valuations of companies like WeWork, is over according to Davidson. When the IPO pipeline cranks back to life in earnest this year, expect a friendly reception to tech firms in key fundamental categories like software or data warehousing. Expected tech IPOs this year include Snowflake, GitLab, Unity Technologies, and others.
Microsoft and Alphabet are holdings in Jim Cramer's Action Alerts PLUS member club.