The white collar recession is well under way.
After nearly a decade of six-figure salaries, cushy jobs and extravagant office perks, Silicon Valley firms are finally cutting back. Almost 90,000 technology workers were laid off in 2022 alone. This year is not off to a good start either. Amazon announced 1[ads1]8,000 layoffs on January 5.
Don’t miss out
And now SEC filings show that Microsoft plans to lay off 10,000 employees by the end of the third quarter.
Things are not much better for those who have (so far) escaped the layoffs. Countless tech firms, private and public, have seen their valuations plummet over the past 12 months.
And now the Financial Times reports that a number of panicked laid-off workers are “flooding secondary markets” with their shares of their former companies. Which means those valuations are likely to plunge even further.
Here’s what it could mean for your portfolio—and where you might want to turn.
The technique falls down
Record low interest rates in the last decade pushed more investors to seek out risky investments. Loss-making technology companies were perhaps the riskiest place for this excess cash. Tech valuations have risen since 2020, allowing startups and tech giants to use their inflated stocks as a way to retain talent.
Technical workers were paid large amounts of 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 boosted the total compensation of tech workers during the boom, but is now having the opposite effect as valuations plummet.
Invesco QQQ Trust ( NASDAQ:QQQ ) — a fund that tracks technology stocks — is down 22.7% over the past 12 months. Meanwhile, private companies have also seen their valuations plunge as much as 80%. Employees of these firms are rushing to cash out on the secondary markets, according to a recent report from the Financial Times.
Companies struggling to generate profits have been the biggest losers so far. An index of loss-making firms prepared by Morgan Staney is down 54% in the past year. Many of these money-losing firms have seen their valuations settle at pre-pandemic levels.
Looking ahead, some experts believe that valuations will not recover until the Federal Reserve pivots on its interest rate strategy. Lower or flat interest rates can make risky tech stocks more attractive. However, it is unlikely to happen before the end of 2023 at the earliest, according to interest rate swap agreements.
Until then, investors should probably focus on highly profitable tech companies that have been unfairly punished during this crash.
Adobe (NASDAQ:ADBE) has lost 31% of its value over the past year. The company underperformed the broader market by a large margin. However, its underlying business is still thriving.
The company reported $17.61 billion in revenue for fiscal 2022 — up 12% from the previous year. And in September, the company acquired the design platform Figma, which expands Adobe’s suite of essential design tools.
The company is also getting involved in the upcoming artificial intelligence boom by tracking how users use essential tools and integrating OpenAI’s tools with Figma.
The share trades at a price-to-earnings ratio of 33.9.
READ MORE: 4 Easy Ways to Protect Your Money from White-Hot Inflation (Without Being a Stock Market Genius)
Microsoft (NASDAQ:MSFT) is also getting in on 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 early this year, meaning the online search market is on the verge of disruption.
But none of this is reflected in the share price. Microsoft has lost 21% of its value over the past year. It now trades at just 24.5 times net earnings per share.
The world’s most profitable technology company certainly deserves a mention on this list. Apple (NASDAQ:AAPL) posted $6.11 in earnings per share in its most recent quarter — up 9% from a year earlier. This year, the company is expected to launch a new virtual reality headset and continue its supply chain migration from China to India.
Apple stock trades at 21 times earnings, making it an ideal target for investors in 2023.
What to read next
This article provides information only and should not be construed as advice. It is supplied without warranty of any kind.