After companies like Amazon, Google, and Meta released their first-quarter results earlier this year, their share prices dipped slightly. Although many tech companies’ profits continue to grow, there was a feeling that these companies were not performing as expected by their investors. Although analysts gave a thumbs up to the companies’ performance, many are starting to question whether tech companies are hitting a ceiling. We explore below.
Growth in Online Metrics
Almost all metrics companies use to measure growth online grew for the five years. This is easy to see when you check what happens on the internet in a minute now versus a few years ago. Although fragmented across more platforms, we know the number of users has increased over the past five years.
The number of searches on major search engines has also increased, with 5.7 million searches per minute on Google in 2021 compared to 3.5 million in 2017. Logins on social media platforms are also on the rise, with Facebook reporting 1.35 million logins per minute in 2021 compared to just under one million in 2017.
However, these companies are struggling to grow their revenues even with these metrics. Google reported a respectable but still concerning 23% increase in revenue in the first quarter of this year, with Meta reporting an 11% increase in the same period. These numbers are concerning because they are lower than what investors expected.
Growth Expectations
Because of their rapid growth, people expected tech companies to continue growing as they have in the past. Looking at internet user growth statistics, you can see that these companies grew very fast at the start, making products that led to heavy investment in the companies’ stocks.
The higher demand for these stocks then skewed how tech companies were valued, with some companies valued up to 50x their revenue. This is a very high valuation, given that companies in other sectors are typically valued at 3-10x their annual revenue.
The reason for such high valuations is because of how good these companies are at generating cash and expanding. Take away these two things, and you are likely to see stagnation in their growth, revenues, and, consequently, their valuation.
Victims of Their Own Success
Many tech companies can be thought of as victims of their own success. The profit growth rate in their first few years grew at 30% to 50% for the two reasons we discussed in the preceding paragraph.
With such expectations, investors will be disappointed when it comes time to announce earnings, where the growth is recorded at 15% or 25%. The disappointment when this happens is what makes the stock prices of tech companies start sinking.
Even with investors’ high expectations and disappointment, people still invest in innovative tech companies. This means a lot of underfunded innovations can reinvigorate this sector; investors only have to help them surface so more people can know about them.
Realities Online and on The Ground
Even though one might think tech companies continue growing their revenues and expanding for years to come – and investors certainly think so – that is not feasible.
Tech companies are starting to lose customers because their markets are saturated. Almost everyone who can use their services is already using them. There is no more room for growth in their traditional markets unless they tap into new markets.
Because these tech companies rely on people being online, the best way to onboard more customers is to ensure they have an internet connection. This is why Facebook started investing heavily in internet connectivity in Africa. Other companies are beginning to see Facebook’s reasoning, with technologies such as satellite low-earth-orbit connectivity coming to the fore as solutions for growth.
Tech companies also realize that urban markets are already saturated, so they are developing solutions for rural markets. Easier internet access is just one solution, with periodic markets, mobile traders and agents on the ground, and permanent retail shops as some of the other solutions tech companies are exploring.
The concern among investors, even with tech companies doing all this, is what companies will do once they saturate the new markets. Perhaps at that point, tech companies will have indeed hit a ceiling.
When you look at user growth numbers in recent years, it is easy to conclude tech companies are hitting the ceiling. They need to start thinking of entering new markets, using innovation, and providing additional products and services that appeal to new markets to keep growing. However, investors, CEOs, and CFOs say there is still enough innovation in the sector to see these companies continue to grow and even thrive for decades to come.
