Today’s market sentiment feels a lot like 2008 when investors where sanguine about the early days of the credit crunch which eventually ballooned into the Great Recession.
My experience covering Technology companies in 2008 was that many Equity analysts and investors did not have a clue what a credit crunch was. All they knew was that companies where telling them “everything is fine”. I recall sitting in Accenture’s (ticker: ACN), analyst day in New York on the precipice of the Great Recession. Former ACN CEO Bill Green said during Q&A that the company was not seeing any softness within the market.
- Companies won’t tell you directly that they are seeing macro softness until there is no denying it. However, they will tell you indirectly through their actions. For example, all of the Mega Cap Technology companies have slowed hiring.
- Slowing the pace of share repurchases is a sign that companies have less visibility. Slowing the pace of M&A similarly speaks to less visibility. Reducing a dividend is another obvious sign.
- Growing Receivables outside of seasonality is a sign that partners and customers may be struggling. Stretching Payables is a technique companies use to preserve cash.
- While it is difficult to hide softness on the “license” revenue line, it is easy to hide softness on the “subscription” revenue line as subscription revenue recognized today was booked in prior quarters. Therefore, try to back into bookings for the quarter using the “Deferred Revenue” balance if the company in question does not disclose bookings.
- From a macro standpoint we know that persistent inflation will eventually eat into demand (we see this in the Q1 and Q2 Real GDP figures, the Atlanta Fed is at a negative 1.6% estimate for Q2 Real GDP), and therefore negatively impact revenue for many companies, not just Ad-revenue focused companies. Similarly, expenses will have increased for most companies as a result of the inflation of the past year and it is unlikely that companies will be able to 100% protect earnings through price increases and job cuts.
- We know interest rates are going higher in the near-term. Given that most investors expect the Fed to pivot policy it seems to me the risk is that the Fed will not pivot in the timeframe that investors have come to expect. We just had a 9.1% CPI print and I would be shocked if the Fed pivots when the CPI falls to 8% for example.