Fund managers tend to avoid the empty quarter in the Arabian desert. It is an immense area that is larger than Thailand. It has less than 1% of Thailand’s population.
The region has a vice-like grip on the world’s energy. But, most investors would rather follow the oil market on the screens. This is understandable. The heat and isolation in the desert can be unbearable. Travellers used to face certain death if they got lost.
There is a travel book on The Empty Quarter called Arabian Sands. Its author Wilfred Thesiger travelled for weeks in the desert. He had only one glass of water a day in 45-degree heat. He did not have a tent and slept on the sands. The Englishman was ecstatic to arrive in a town where food and water were plentiful. Thesiger’s travels were in 1949. Investors in tech in 2023 may share his elation. Tech has now emerged as an unlikely haven in the 2023 panic.
The collapse of the Silicon Valley Bank, trading as the SVB Financial Group, has escalated into a wider issue. UBS has announced a takeover of Credit Suisse for US$3.3 billion ($4.3 billion). Deutsche Bank’s credit default swaps (the cost of insuring against its default) have risen to a four-year high.
Tech stocks have been defiant in the SVB crisis. The tech-heavy Nasdaq-100 has outperformed the S&P500 by 4% in the last two weeks. Emerging market tech has outperformed S&P500 by 4% as well.
SVB’s travails have led to fears of a financial meltdown. Tech shone brightly during the 2008 Global Financial Crisis (GFC). The GFC crushed equity markets. The S&P500 fell 38% in 2008, a record that hopefully won’t be broken.
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The tech companies such as Amazon.com and Netflix did relatively well at the time. During the worst of the GFC (January 2008 to March 31, 2009), Netflix outperformed the S&P500 by 107%. Amazon outdid the S&P500 by 27%.
There is a clear case to feel safe in the tech giants. Tech was at the heart of the pandemic boom. The lockdown was a godsend for the disruptors. Many of them made hay while the sun shined. Companies like Apple, Microsoft, and Alphabet now have a combined net cash balance of US$110 billion.
These reserves make it less reliant on outside funding. They can manage a tougher lending environment. They are better capitalised than troubled mid-size banks.
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Some of Asean’s tech players are well-funded as well. Grab Holdings has a net cash balance of US$5 billion. Sea’s net cash is even higher. Bukalapak.com’s market cap is 20% higher than its net cash of US$1.5 billion.
The tech sector’s costs are about to fall. Major layoffs have already reduced their labour costs. In 2023 alone, 118,000 tech workers have lost their jobs in the US. Google — whose parent company is Alphabet — is cutting 12,000 workers this month. This would mean its headcount is a fifth lower than a year ago.
Asean tech is joining the fray. Sea has cut its workforce by over 20%. Some of its foreign hires only found out they had been axed after they landed at Changi Airport. The unfortunate recruits receive marching orders in the first text message after they get off the plane. Sea’s cost cuts have been so deep that they evaded the attention of the market. It shocked the market with a profitable 4Q2022 result.
Unlike the US giants, the Asean tech players are burning cash. Understanding their cash flow position is vital. The concept of the cash runway is an excellent tool. It is the number of months of cash burn that a company can fund. Bukalapak.com is the stand-out performer. It can fund 154 months of cash burn. Grab and Sea can fund 81 and 56 months. Having sufficient cash to fund 56 months is a healthy position.
Not all tech companies have enough ammunition. GoTo Gojek Tokopedia, which is the product of a merger between e-commerce leader Tokopedia and ride-hailer Gojek, maybe a mirage. It could run out of cash in a few quarters. The banking travails may put pressure on the market. Tech may stand out like a beacon of light. It could relieve investors just like an oasis for a thirsty traveller.
Nirgunan Tiruchelvam is head of consumer and internet at Aletheia Capital and author of Investing in the Covid Era. He does not hold any position in the stocks mentioned in this column. This column does not constitute investment advice of any kind
