3 ms·

> Tech is an interest-rate-sensitive industry. why? funding?

• mitthrowaway2 3y ago
  There are several reasons, some of which are mathematically equivalent to each other, but basically tech is an industry in which large expenditures are being paid in the present in the hopes of producing revenue growth farther down the road in the future. Even in a profitable company like Google, which has existing revenue streams, some of the headcount is there to keep the systems running, but much of it is still investment in future growth. In an unprofitable company like (Uber? I haven't checked), they're losing money in the present in the hopes of earning more in the future. Contrast with, say, Kellogg's, where most of the headcount is there to sustain existing revenues and production, and only a little is being invested into new product lines, cost-saving optimization, and future growth. As interest rates rise, it makes today's revenue more preferable and future revenues less important. That has a strong impact on the valuation of companies like Uber and Google, and a weaker impact on the valuation of companies like Kellogg's. A company that is still pre-profit but has a bit of revenue might need to cut its expenses to become profitable, even at the expense of future growth. A company that is pre-profit with no revenue might want to keep its employees to launch products ASAP, but with investment drying up it could go bankrupt first. And at a company like Google, the shareholders may be interested in pivoting towards the Kellogg's model to keep the share price high. So they lay off a bunch of cost-adding developers, and focus more on stretching today's advertising revenue as far as possible. The only future development being pursued will be the ones where payoff is so big that it's worth it even at a high discount rate, so perhaps AI.