Everywhere you look, big tech and its many tentacles – AI, medtech, automation, big data, social media – seem to dominate the news cycle at the moment.
Megacaps like Nvidia, Meta, and Amazon have propelled the technology sector to comprise 30% of the S&P 500 alone and the loose grouping formerly known as FAANG – Facebook, Apple, Amazon, Netflix and Google – really ‘the big seven’ with the addition of Microsoft and Tesla, are ubiquitous.
But Big Tech hasn’t taken off in places other than the US the way it was expected to.
Regulatory intervention mutes Chinese tech
In China, for example, prominent Chinese companies like Alibaba and Tencent have seen their market capitalisations drop by up to 75% from their peaks over the last three years.
This decline stemmed from a sweeping regulatory crackdown by the Chinese government beginning in late 2020, an initiative that lasted 18 months.
The measures introduced included stringent antitrust, data and labour regulations, with substantial fines levied against companies for monopolistic practices.
Giants like the aforementioned Tencent and Alibaba, as well as Ant Group, were compelled to divest non-core businesses and undergo significant restructuring to diminish their market influence.
This enforcement phase aimed to address regulatory issues caused by years of unchecked growth and competitive disorder, but the rapid changes led to confusion and sparked concerns about the predictability of China’s regulatory environment.
According to Time magazine, from 2021 to 2022, investment in China’s internet sector plummeted by 80%, from $49 billion to just $10 billion, with the total market capitalisation of these firms decreasing from $2.5 trillion to $1.4 trillion.
The regulatory crackdown not only impacted local firms but also foreign tech companies and investors. In 2021, LinkedIn and Yahoo withdrew from the Chinese market, citing escalating compliance costs and a challenging operational landscape.
The retreat of private investors created an opportunity for state-owned entities to acquire ‘golden shares’ in subsidiaries of big Chinese companies, perpetuating the cycle of government intervention in corporate decisions.
Of course, this cycle led to the TikTok ban from the US Congress, which mandated that the popular social media channel – perhaps the country’s most successful tech export to the Western world – must be sold to an American owner within a strict timeframe.
These factors all hamper the country’s ambition to achieve technological self-sufficiency and compete with global tech leaders like the US. But tech is not an easy sector for Australian plays either.
Australian tech hampered by rates uncertainty
Back in Australia, our tech sector remains vulnerable to economic vicissitudes. With inflation and rates both looking like they’ll stay on a rolling boil for the foreseeable future, what’s on the tea leaves for Australian tech?
“The Australian tech sector had a big clean-out during the post-pandemic change in inflation alongside the cost and availability of credit which saw the ASX Information Technology Index dive from highs of 2,403 in late 2021 to just 1,267 by June 2022 – a massive drop of 47%,” said Webull Australia CEO Rob Talevski.
“While some of the US-listed behemoths like Apple, Alphabet and Amazon have more recently grown to achieve multi-trillion-dollar valuations, smaller tech firms seeking growth capital have not enjoyed the same growth. Locally, higher interest rates for longer will continue to punish smaller growth tech stocks, with more established players being favoured by risk-averse growth investors.
“Multi-billion market cap favourites in Australia like WiseTech Global Ltd, Xero Ltd and NEXTDC (ASX:NXT) have the access to raise capital and exploit growth opportunities without significant dilutionary effects, and will disproportionally prop up this market, leaving the <$1 billion market cap constituents fighting for attention through innovation and organic growth.”
