Say Goodbye to The Free Money Era
2022 has been a brutal year for stock market investors. The US blue-chips are down 18% this year, while the S&P 500 is down 23%, and the tech-heavy Nasdaq has fallen 32%. From mature public market players like Netflix to newcomers like Grab, tech companies all over the world are losing significant market value following the release of these mostly mediocre earning reports and a slew of macroeconomic headwinds, including the war in Ukraine, snarled supply chains, and sky-high inflation rates. To top it off, the Federal Reserve is aiming to combat inflation by raising interest rates, which makes borrowing more expensive for corporations and households, thereby stifling economic growth and potentially leading to a recession. As the world begins to return to work and spend less time at home, investors are also concerned that these tech companies would not be able to sustain the growth rate they have delivered during the pandemic.
This report highlights the performances of notable tech companies’ in Q1 2022:
Alibaba (NYSE: BABA)
The market reacted positively to Alibaba’s stock on earnings call day despite the 59% decrease in net profit YoY, mainly due to regulatory crackdowns and stiff competition. The annual number of active consumers within the firm’s ecosystem reached 1.31 billion (+2% YoY) with 76% of them based in China. China’s commerce was the major contributor to the company’s revenue with $20.9 billion primarily due to the success of its direct sales businesses, such as Freshippo and Tmall Supermarket. Meanwhile, the increase in Alibaba’s international commerce retail business revenue was primarily due to the growth in revenue generated by Lazada.
Amazon (NASDAQ: AMZN)
Amazon’s share fell by 9% despite reporting strong annual earnings for Q1 2022, possibly due to signs of slower growth compared to that of previous years. Amazon Web Services’ 37% increase in revenue YoY to $18.4 billion for Q1 2022. This growth was driven by new commitments from customers across industries such as telecommunications, aerospace, sports, technology, and healthcare. The company’s consumer business has been growing 23% annually over the past two years, requiring the company to double the size of their fulfillment network.
Its streaming and rental service arm Prime Video debuted 30 originals internationally, including series and movies that were launched in Argentina, Brazil, Australia, Canada, India, France, Germany, Japan, Italy, Mexico, the Netherlands, Spain, and UK. In the same quarter, Amazon launched a $1 billion venture investment program known as the Amazon Industrial Innovation Fund that aims to empower companies in the customer fulfillment, logistic, and supply chain sectors.
Alphabet (NASDAQ: GOOGL)
Alphabet reported a total of $68 billion in its Q1 2022 revenue, with $61 billion coming from Google’s advertising, app sales, in-apps purchases, digital content products, hardwares, and fees received from subscriptions. YouTube’s revenue increased 20% YoY reaching $6.86 billion, despite showing slower growth compared to the last two years due to post-pandemic ‘return to normal’. Youtube’s short video feature saw an increase in number of daily views, reaching 30 billion (+400% YoY). Meanwhile, Google Cloud, the tech giant’s second biggest segment after Google Services, contributed $6 billion in revenue from fees for Google Cloud Platform services, Google Workspace collaboration tools, and other enterprise services. However, the cloud division remains unprofitable, reporting an operating loss of $931 M, compared to $974 M a year earlier.
Apple (NASDAQ: AAPL)
The majority of Apple’s Q1 2022 revenue came from product sales amounting to $72.7 billion with iPhone leading, contributing $50.6 billion, following the success of the latest released phone products, which included the third-gen iPhone SE, and the green-colored iPhone 13 and iPhone 13 Pro. Apple also launched the Mac Studio desktop and the 5K Studio Display external monitor. Apple also showed a 17.3% YoY increase in their service revenue, which includes their digital content store and streaming services on various platforms, such as Apple Music, Apple Arcade, AppleCare, and more. Across the company’s service platforms, they serve over 825 million subscribers.
GoTo (IDX: GOTO)
GoTo recorded a 53% rise in gross revenue to $359 million supported by better monetization strategy in both their e-commerce (Tokopedia) and on-demand (Gojek) arm, enabling the company to achieve a higher take rate from 3.5% to 3.7%. GoTo showed their growing GTV of 46% YoY $9,439M, where mainly came from the Financial Technology Services segment that accounted for about 44.6%. Their growth are futher supported by the popularity of their new product initiative GoPay Coin which enables customers to earn rewards from Tokopedia. In contrast, GoTo also reported a wider loss of $448M, 3 times bigger than the last quarter.
Grab (NASDAQ: GRAB)
Grab surprised investors with a better-than-expected Q1 2022 earnings result. The increase in revenue was driven by three business segments namely deliveries, mobility, and financial service where the deliveries segment contributes most of the company’s GMV with growing monthly transacting users (MTUs) and average spending per user by 26% and 19% YoY. Meanwhile, the mobility segment contributed $834million to the company’s GMV mostly driven by improvement of the MTUs that continued to recover while the mobility segment’s GMV rose 3% YoY
Furthermore, the financial service segment also contributed $11M to the company’s revenue, mostly driven by its Buy Now Pay Later products, which saw 5x growth in total payment volume. They also succeeded in driving user stickiness for OVO, as evident with the 57% increase in the number of Indomaret top-up transactions. In the same quarter, Grab launched their first Islamic financing product in partnership with Sedania called Grab Cash Financing-I in Malaysia, intended for Grab drivers and delivery partners to secure financing access with Sharia compliance.
Meta (NASDAQ: META)
On its Q1 FY 2022 earnings report, Meta showed the slowest growth since it became public 10 years ago with only 7% increase in company’s revenue and 4% increase in daily active users hitting 1.96 billion. However, Meta’s stocks surged 18% on its earnings announcement day.
Furthermore, Facebook’s family of apps (FOA) contributes $27 billion in revenue (+6% YoY) or 97.6% of its total revenue in Q1 2022, with its core app, Instagram and WhatsApp, accounting for 97.5% of revenue in the quarter. Ad impressions across the FOA saw a significant increase by 15% YoY. The remaining $695M was contributed by Reality Labs, which builds products for the metaverse. Reality Labs booked a loss of $2.96 B in the period compared to $1.83 B in the first quarter of 2021.
Netflix (NASDAQ: NFLX)
Netflix reported a $7.9 billion revenue in Q1 2022, with 43% coming from the United States and Canada. However, Netflix is experiencing a slower pace of growth in the past three years due to 200,000 subscribers to 221.6 million. Following the release of its Q1 2022 earnings report, the company’s shares were down 23% in after-hours trading.
To maintain its share of the competitive streaming market, Netflix has focused on increasing its content spend, particularly on Netflix Originals, to keep up with the audiences’ demand. Moreover, Netflix announced plans to address the problem of account sharing by charging account holders a fixed monthly fee if caught sharing passwords with someone outside of their registered addresses. They have begun testing these schemes in select countries including Peru, Costa Rica, and Chile by charging an $2-$3 per month for two additional users.
SEA Group (NYSE: SE)
After two years of pandemic-driven rapid increase in sales, SEA Group’s growth is beginning to plateau. Its digital entertainment arm Garena experienced a 95% quarterly active users YoY decrease to 615.9 M and a 77% paying users YoY decrease YoY to 61.4M. The loss was significantly contributed by the banning of Free Fire in India due to the country’s national security concerns of the possibility that Garena might be sending users’ data to servers in China. SEA Group is planning to overturn Garena’s slow pace of growth with innovation of new games across diverse genres such as multiplayer action, role-playing, VR, and casual games.
As for SEA’s ecommerce arm, Shopee recorded a 39% YoY increase on GMV to $17.4Bn. Shopee’s take rate on average is 8.6% making the quarterly revenue contributed by Shopee $1.5Bn (a 64.4% increase YoY). To further increase Shopee’s numbers, SEA is planning to onboard more brand partners for Shopee Mall. To increase SEA’s market share in Indonesia, SEA will launch a new insurance business.
Twitter (NYSE: TWTR)
Twitter’s revenue increased 16% YoY to $1.2 billion in Q1 2022 with over 90% coming from ads, in line with the increase of its monetizable daily active users by 15,9%. The company also reported gains from its sale of MoPub, their mobile apps monetization service, to AppLovin in a $1.05 billion deal. The company is ramping up its effort to safeguard its platform and boost trustworthiness by removing fake pages and accounts. Twitter also launched several new initiatives, including a feature that enables users to connect their profile pictures and with their NFTs, and Twitter Blue, a subscription that allows Australian and Canadian users to access new features including Bookmarking Folders, Reader Mode, and content monetization for $5 a month.
The company is also in the process of finalizing its buyout deal. In April, Elon Musk signed an agreement with Twitter to buy the company for $44 billion at $54.20 a share and take it private. But the deal still has not closed with Musk increasingly signaling his discomfort with it, suggesting that he wants to negotiate a cheaper price or even to walk away entirely.
Zoom (NASDAQ: ZM)
Zoom’s stock increased 16% after the company released its Q1 2022 earnings report, in line with its 12% increase in revenue to over $1 billion. In the same quarter, Zoom also disclosed their recent acquisition of Solvvy, a conversational AI for customer support, as part of their long-term goals to redefine the contact center category through a combination of unified communications and excellent customer experience.
Impact on Venture Capital Investments
Tech companies are especially vulnerable during an economic downturn as most of these early-stage enterprises have yet to become profitable, heavily relying on external investments to cover expenses while they focus on rapid growth — something that seems to be becoming more difficult as the world returns to its pre-pandemic days, slowing down the consumer demand for digital products and services. Despite the spike of venture capital deals in the past two years, which reached a record high of $621 billion globally last year, panic over tech sell-off is starting to set in. Everyone seems to be talking about how investment deals are being renegotiated at lower valuations and even the withdrawal of term sheets. People have begun using the phrase “zombie unicorns” to refer to highly valued but shaky startups that might need new investors to rescue them. IPOs, the traditional VC and PE exit route, are also starting to dry up, with the US market reporting only 34 IPOs so far this year, down 78% from the same period last year.
SoftBank Vision Fund reported a loss of $27 billion across its three large venture funds—Vision Fund, Vision Fund 2, and a Latin American venture fund, partially due to the reduced value of its holdings that previously became public, like Coupang (CPNG) and DiDi Global (DIDI). Softbank CEO Masayoshi Son announced plans to cut investments by half this year. Y Combinator sent out letters to its portfolio 0founders titled “Economic Downturn”, advising them to “plan for the worst” and focus on staying alive, highlighting the importance of raising money to extend their runways now instead of later when fundraising becomes even harder. Sequoia also urged founders to preserve cash for survival; this time through a 52-page slide presentation, instead of the usual grand memos they did in 2008 “R.I.P Good Times” and early coronavirus pandemic “The Black Swan of 2020.”
It is unclear how long and which way the current downturn will go. Regardless, whatever happens in the public markets will take some time to affect early-stage startups. Venture capitalists and private equity investors are sitting on immense piles of cash from earlier fundraising rounds. Indonesia’s venture capital firms have $1.6 billion of assets under management today, many of which have yet to be deployed. Similarly, many tech startups are still well-funded from the many successful fundraising rounds seen last year. Even in this challenging time, a total of 157 Indonesian startups received funding in the first half of 2022, double that of the same period last year. Some of the biggest rounds include Xendit’s $300 million Series D, Sayurbox’s $114 million Series C, and Pintu’s $113 million Series B round.
Evidently investors are still investing; they are just more selective with their investment choices. This, along with high interest rates, seems to mark the end of the free money era. Startups need to start thinking about real earnings now and be more conservative with their cash reserves. It is not so much about being the fastest-growing company in the world anymore; it is about offering invaluable products and services and growing them at a more sustainable pace.
OCBC NISP Ventura
June - July (Wk1) 2022 Newsletter