Here’s how Fed rate hikes are hurting tech firms
Rising interest rates fueled by Federal Reserve’s rate hikes is constraining tech firms of all sizes.
After more than a decade of low borrowing costs, rising interest rates are forcing tech companies to rethink their strategies, with companies needing to show their profitability over the possibility for growth. The change could be squashing nascent start-ups and be one factor in the widespread layoffs from industry giants.
Analyst Dan Ives with Wedbush, a wealth management and advisory firm, told The Hill the Fed’s’ “warpath to combat inflation” with raising interest rates created a “dark cloud for the tech sector.”
“Tech firms were spending money like 1980s rock stars the last four to five years, and now demand cracks are forming and we’re seeing layoffs across the board,” Ives said.
“I think many tech firms are ripping the band aid off proactively to prepare for the oncoming economic storm,” he added.
The recent hit is a slide from a strong couple of years for the tech industry during the height of the pandemic. The tech sector fared well where others sectors faltered, boosted in part by a rise in work from home culture and consumers spending the stimulus checks received from the government coupled with low Fed rates at the time fueling the stock market.
The Fed’s monetary policy committee is expected to raise its baseline interest rate range by 0.25 percentage points Wednesday. It would be the eighth consecutive hike in as many meetings, but the smallest since the Fed began raising rates in March 2022.
Ives said it’s created a “do or die” environment for tech startups. In the past companies were in a strong position to obtain funding, “now the spigot [has] been shut off,” he said.
Shyam Kumar, a professor of management at Rensselaer Polytechnic Institute’s Lally School of Management, named the online used car retailer company Carvana as an example of a company that “grew too much during the pandemic.”
Carvana, which sells and finances cars and trade-ins online, has seen its business tank as interest rates climbed and borrowers fled. Carvana’s stock is down 94 percent over the past year and bottomed out at less than $4 per share in December from a peak of $362 in August 2021.
“Now that the market has tightened, it’s become an issue of moving from a growth orientation to a profit orientation,” Kumar said.
“These companies have to really prove themselves in terms of being profitable as opposed to showing growth,” he added.
With interest rates rising, the tech sector across the board “has to tighten its belt” and use more discipline rather than focus on “moonshot” projects,” Kumar said.
The threat of more rate hikes tipping the economy into a recession has also been a looming specter. For established tech companies, including industry giants like Meta, Google parent company Alphabet and Amazon, some of that belt tightening has come in the form of mass layoffs.
Between those three companies alone, they have axed or announced plans to lay off a combined 41,000 employees.
In part, companies are cutting staff to respond as a “sort of correction of the over-hiring” done during the earlier part of the COVID-19 pandemic, when demand at those companies was higher, Kumar said.
There is also a “contagion effect,” where one company may see another cutting staff and feel they have to do so, as well, he added.
The question now becomes if the layoffs are cutting deeper than into the over-hiring, Kumar said.
The latest interest rate hike coincides with the start of a two-day stretch of the nations four largest tech firms announcing their latest quarterly earnings, when the company’s chief executives will offer a peek into their decisions to cut costs with layoffs and areas they are looking to invest in to boost.
Meta kicks off the earnings calls Wednesday. Alphabet and Amazon will share their reports on Thursday, as will Apple, which has not announced layoff plans.
In the earnings reports, where companies will also lay out outlooks for the next several months, Kumar said it will be crucial to look out for whether companies are cutting capital expenditures or research and development costs. That would indicate the budget tightening goes deeper than reversing for any pandemic induced over-hiring, he said.