February 2020 - Market Commentary & Research

The 2010’s, where everyone is a tech company

The 2010’s stock market gains were not evenly distributed. Technology stocks, unsurprisingly were one of the biggest gainers in the past decade. Affecting seemingly every aspect of our lives today, technology: hardware, software, tech-enabled services, etc. gains scale and dominance at a pace not previously seen. This dominance is creating new markets and business opportunities. At the same time, the qualifier “tech” company gets thrown around with increasingly frequency.

The market has become fascinated with technology’s role in our lives and the economy, but echoing the dot-com boom, not all of these advances or companies are sustainable. The dominance behind giants such as Microsoft, Amazon and Apple to name a few, have come about due to sound economics. Whether this be offering a zero marginal cost software, creating devices people simply won’t live without or upending a traditional industry, like retail, with a more convenient service offering these giants have strong economics supporting their business model and technology. As we enter a new decade, it’s worth asking what is a “tech” company and how should technology be analyzed within business models going forward.

Chart I - S&P 500 Major Sectors 2010 - 2019 Returns (Indexed) - Technology Sector in Red

Technology is accelerating at a pace most can’t keep-up with. Since the boom of the internet in the 1990’s and early 2000’s, the uses of software, hardware and network connected devices has grown rapidly. We’ve gone from computers as a novelty item to an essential part of everyday business. We’ve gone from simple cell phones to mini-handled-computers, which we are helpless without. Would any of us know how we’d function without the internet for a week?

Technology has become crucial for business and has allowed new companies to spawn rapidly and claim “tech” as part of their business model. This revolution has not been without its flaws though. The 2010’s ended with investors challenging the valuations of some of these so called “tech” companies.

WeWork is the most vivid example of this shift in perception. WeWork touches areas of technology and uses technology, such as data-analytics, to assess operating performance but it’s far from a “tech” company. As was widely covered and once considered the most valuable start-up on the market, WeWork’s road-show led to increased scrutiny over its business model and a scrapped IPO (WSJ). Of course, the arrangements its founder had with the business and subsidiaries was a significant factor, but the scrapped IPO highlighted the discontinuity between business that are tech-like or riding the tech-wave, and the economics of the industry it operates in: commercial real estate (Washington Post). 

Moving further along the spectrum to more “tech” are Uber and Lyft. Both companies have not fared particularly well in the public markets. Regulation and competition are central factors in the decreased valuation of these two companies since going public, but the extent to which these two fit the “tech” qualifier is also debatable.

Technology (an app) is the primary medium in which consumers use these services, but their end market is taxing people, not exactly high-tech. Without the current technology neither would exist today, but simply engaging with customers via an app doesn’t turn a taxi service company into a technology company. Nor does an app remove the two from the competitive industry dynamics that characterize the taxi industry, hence their consistent losses.

Chart II - Uber and Lyft Stock performance

Finally, the most recent company to test the market as a “tech” company has been Peloton. Peloton the maker of high-end (expensive) fitness equipment: stationary bikes and treadmills, has taken the fitness community by storm. The combination of sleek equipment, a virtually connected & fanatic user base and high-quality workout content has generated substantial optimism for Peloton. At its core, the company is reorganizing existing technology: touch-screens, Wi-Fi connected devices and social networks to reimagine workouts. Technology enabled? Yes. Technology company? Highly debatable.

This isn’t a critique to suggest all of these ideas are flawed or bad investments. Uber and Lyft have been extremely convenient for this writer, and fitness products like Peloton can be a great way for people who seek a flexible but group-oriented fitness regiment, but they can’t all be technology companies. Like the internet in the Dot-com bubble, technology today isn’t the end-all-be-all. Technology is exciting, but sound business models, sustainable methods to monetize demand and favorable economics are still required.

We must remind ourselves of how ubiquitous technology is today and what really drove the value of the current technology titans. The 2010’s tech-companies have no-doubt changed the way we live, but for many companies they are still rooted in traditional industries. Traditional industries are not undesirable but a reminder of how much technology can get over-hyped. Positively, It also is a reminder of how much opportunity there is to continue using technology in new and innovating ways. So, the next time you encounter a “tech” company looking to go public, e.g. Casper Mattress, or hear about the latest “tech” valuation give some pause and ask, “so you’re a tech company?”.