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Big Tech And Its Impact On Stock Markets

By Howard GoldsteinStock MarketsOct 18, 2018 11:30PM ET
Big Tech And Its Impact On Stock Markets
By Howard Goldstein   |  Oct 18, 2018 11:30PM ET
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Large technology companies have been dominating the headlines recently. Whether it is Facebook’s relationship with data, Amazon’s relationship with their workforce or Netflix’s booming subscriber base, it’s all about these companies.

These companies are getting so big people have even started to create acronyms for them – FAANG (Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), Google (NASDAQ:GOOGL).

With the President of the United States pinning all political success to the performance of the stock market, the power of large technology companies can’t be underestimated.

Technology as a sector is almost as large as the second and third sectors combined in with the S&P 500. Five technology companies account for over 15% of the S&P 500! If Trump is relying on the stock market to determine his success, it’s clear that he is relying on large technology companies to continue to grow rapidly.

Relationship between large and small technology companies

Perhaps unsurprisingly, large technology companies can exert their power over smaller technology companies. Recent frustrations from website posters, as pointed out in this post, show how much power Google has over smaller companies.

All Google must do is change their algorithm, or in this instance change the Google Search Console, and smaller businesses will be under a lot of pressure unless they can adapt. And who can these smaller companies go to adapt? The large technology companies.

The reason for this power is two-fold. Firstly, as I eluded to above, smaller companies rely on larger companies for their web services. Whether it be pay-per-click advertising via Google or Facebook. Making use of Amazon Web Services, or using Microsoft’s Cloud, small technology companies have an over-reliance on larger technology companies.

The second predominantly stems from the current technology bubble that has formed. It’s clear that there is a bubble by the fact that eight technology companies account for 122% of the S&P 500’s total returns for the 12 months to July 2018.

The current model for smaller technology companies is a path to acquisition. The entrepreneur will come up with an idea, create a minimum viable product (MVP), get seed-stage investment and possibly a second or third round of funding. Once the technology product has been established and has a client base, they will be bought out by a much larger company.

The entrepreneur, and other shareholders, get a large pay-out and in some instances continue to work for the company that they have helped to build. The larger company gets a client book and possible entry to a new market. Amazon is applying this strategy to large companies such as Whole Foods, let alone small ones.

The technology market, as a whole, is following this trend. Company valuations have flown through the roof in recent years as more and more venture capitalists want to be involved. This is driving wages up, but it is also having an impact on the workforce.

A lot of technology workers may be used to working in shorts, but venture capitalists want results, so it may come as a shock to the system when everything comes down to results.

Should we be worried?

In terms of the bubble bursting, yes, but we should also be worried if the bubble doesn’t burst in the short-term and large technology companies continue to consolidate their market power.

Big Tech And Its Impact On Stock Markets

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Big Tech And Its Impact On Stock Markets

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