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Will Credit Crunch Help Or Hurt Tech Cos?

[qi:053] Stocks may be rebounding but the credit crunch isn’t finished. The mortgage market is hungover from a subprime binge. Senseless lending in odd investments like ninja loans have hurt banks. Hedge funds betting on complex, risky derivatives are closing up shop. And it’s only likely to get worse.

The fallout is hurting almost everyone, but not the technology sector – the very sector that, you must recall, has for most of this decade been remembered for its reckless, devil-may-care investments. The credit markets and the financial services companies that seemed to thrive during the lean years that followed the dot-com collapse are now the ones in trouble. But tech is doing just fine. The Nasdaq Financial Services Index is down 7% this year, while the Nasdaq Computer Index is up 9%.

But in today’s markets, no sector is an island. So how is the turmoil in other parts of the financial market likely to affect technology stocks?

Nasdaq Finance Sector vs Nasdaq Computer Sector, 2007 YTD

The credit crunch is likely to hurt hedge funds, banks exposed to them and companies that rely on them for loans. If the more dire predictions hold true and banks cut back on loans, it will be hard for money-losing telecom companies like Clearwire to keep raising money.

But most established tech companies, the ones participating in the broader trend for record profits, are sitting on piles of cash: Microsoft has $28.2 billion in cash and short-term investments, Google has $11.9 billion, eBay $3.2 billion before its new credit facility, etc. That cash can not only help shore up prices through buybacks, they can more importantly position companies to buy targets that might have opted for leveraged buyouts fueled by easier credit.

There are potential downsides as well. Much of the revenue at tech giants have come from consumers. And there is growing fear that consumers, pinched by lower home prices, rising mortgages and ever increasing gas prices, will cut back on spending. That could be bad news for makers of gadgets – people may, for example, hang on to their old cell phones a year longer instead of buying an iPhone – and monthly subscription rates to things like satellite radio. It could even dampen the growth in online advertising, if advertisers realize there is no sense in advertising heavily to tight-fisted consumers.

Another danger may, ironically, come arise from a perception of technology as a safe harbor. Financial bubbles have a certain whack-a-mole quality about them. Not all of the trillions of dollars that vanished from Nasdaq stocks early this decade disappeared into thin air. Some of it found refuge in – that’s right – real estate speculation and the manic derivatives market. Now, money fleeing those markets may flood again into technology stocks.

It hasn’t happened yet. The $12.8 billion that venture funds raised in the first half of 2007 is well under half the amounts raised in all of 2005 and 2006. If institutional investors come knocking with big bags of money to invest, the more prestigious VC firms are likely to keep showing restraint. But the temptation may be too great to pass up for lower-tier firms.

Then there’s the IPO market heating up. Now that some of the more onerous aspects of Sarbanes-Oxley reforms have been rolled back, the IPO pipeline is primed for action. 2007 is already shaping up to be the best IPO market in years, with new listings up 39% over last year.

It’s easy to overstate these dangers, but they are real possibilities. Much more likely is that, after the initial shocks from the rest of the stock markets, the tech sector will see some benefits over the coming months. But it’s also helpful to remember that financial bubbles don’t go away easily – they try to find another home. And seven years after the last bubble burst in technology, we may just be finding ourselves deciding whether or not to enter another one.

11 Responses to “Will Credit Crunch Help Or Hurt Tech Cos?”

  1. I think that the credit crunch is a bad sign for the US economy. It could finally be the time that the US’ overspending catches up with us. We should all try to save more, but of course that’s easier said than done. The economist recently recommended that we try to reign in spending, I believe they want the government to raise some interest rates. Everyone is going to be hurt by this dangerous trend that American consumers have been indulging in.


  2. It should be noted that there is a differentiated value for subprime or stated income loans in the commercial lending market. This loan type is not entirely bad despite the abuse of some in the residential lending arena. Oftentimes, individuals that want to start or acquire a small business, purchase a gas station, acquire a motel, open an auto repair shop or any of a myriad of sole proprietor establishements, and do not have the portfolio that would make them attractive to the big box leaders. Lending companies like Ocean Capital in Rhode Island offer subprime and stated income loans by using up close and personal evaluations of the borrower and the opportunity. We need companies like this to support new business opportunities.

  3. There will definitely be an impact on consumer spending – you just have to look at the spending based on home equity loans and refinancings. Equity extraction was a third income for many Californian families in the past 4-5 years.

    Secondly, there is going to be a lot less mega-sized private equity buyout. For example, Daimler Benz had to step in with financial help for the private-equity buyout of Chrysler.

    But, as with all bubbles, the sooner they crash the better.