Dear reader,

The tech sector mauling is not over yet. On Thursday, the tech-heavy Nasdaq index fell 5 per cent — the sharpest decline since June 2020. The S&P 500 is down 13 per cent this year.

There is little the tech industry can do about decades of low interest rates coming to an end. These companies have tried cutting jobs, paying out via share buybacks and promising not to spend too much money. But these efforts have not stopped the share price slide.

This could be the reckoning for growth at all costs. First-quarter earnings this week from Lyft, Uber and Airbnb provided an update on the gig economy created in the aftermath of the financial crisis. All act as intermediaries between sellers and buyers. With few assets of their own, they should in theory be operating with high margins. But intense competition and the pursuit of growth mean most have yet to report a profitable year.

Of the group, Lex considers Airbnb a good bet. Pent-up demand for holidays means bookings have returned to pre-pandemic levels. Yes, business travel is still lagging behind. But the rise in remote work has encouraged more customers to book longer stays.

Plus, Airbnb was forced to tighten spending when lockdowns hit the business. It is expected to report positive net income this year. Co-founder and chief executive Brian Chesky has ambitions that go far beyond room rentals. Lex hopes the brakes won’t come off spending too soon.

Elsewhere in tech

Not every tech company is promising to lower expenses. Ocado plans to push ahead with a performance incentive scheme that could net boss Tim Steiner £100mn. Lex wonders what will happen if share prices keep falling. Shareholders already unhappy with the scheme are unlikely to support a reset that lowers hurdles.

Online taxi company Lyft shows how quickly stock prices can move. It lost almost a third of its market value this week. That encouraged rival Uber to move its earnings report forward. Like Lyft, it faces a driver shortage, rising fuel prices and stiff competition. Revenues rose in the first quarter, but a net loss of $5.9bn hurt the company’s hopes of sustained profitability.

Ecommerce is faring little better. Etsy, a marketplace for handmade bric-a-brac, is trying to make up for lower sales growth by taking a higher proportion of the money paid to sellers.

In San Francisco, where many of these tech companies are based, inflation and potential recession have overtaken the pandemic as a topic of near-constant discussion. Companies that raised money in the good times are applauded. Buyers of junk bonds from issuers such as internet providers did well too. Lex thinks they have the chance to repeat that opportunity. Rate rises have led to a sell-off across junk bonds. That presents discerning buyers with the chance to scoop up bargains from financially solid issuers.

In Asia, meanwhile, tech has escalated tensions between India and China. Indian regulators have taken control of the bank accounts of Chinese smartphone maker Xiaomi’s local unit, accusing it of breaking foreign exchange laws. Lex believes there is no resolution in sight and no reason to expect Xiaomi’s share price, down 50 per cent in the past year, to recover soon.

Don’t bet against Musk 

After joking that he was at the Met Gala to persuade attendees to help him buy Twitter, Elon Musk finally disclosed the equity commitments that will support his $44bn deal. A group of 19 investors, including Oracle co-founder Larry Ellison and the Qatar Investment Authority, have agreed to put in $7.1bn. That cuts down Musk’s exposure, which is helpful when so much of his wealth is tied up in Tesla shares.

The inclusion of crypto exchange Binance could hint at Twitter’s future. Lex has suggested that it might become a platform for crypto trades — taking on the likes of Robinhood. But we note that the presence of external investors could limit room for experimentation and force Musk to focus on short-term profits. We also want to know how he expects to divide his time between Tesla, SpaceX, Twitter and other ventures such as tunnelling start-up The Boring Company. Presumably, he has someone in mind to take over as Twitter chief? Educated guesses welcome.

Side note — I was part of an FT Live event on this topic during which I found myself defending Musk, if not this deal. You can watch online for the next 90 days (you just have to register your details first).

Oil spill 

While tech companies limit spending, oil companies are trying to balance theirs between investor hunger for payouts and political demands to support climate change initiatives. Shell’s first set of earnings from new chief financial officer Sinead Gorman showed profits rising everywhere, despite write-offs for Russian operations. Still, Shell is mindful of carbon costs.

Spending is not high on BP’s list of aims, however. Boss Bernard Looney is more focused on returns. Capital spending is two-fifths below the levels of the last decade. BP wants to go back to the days of 18 per cent return on capital employed. Lex sees that as out of reach.

Lex believes carbon capture and storage is a significant opportunity for oil and gas producers. High costs could be mitigated by investment in technology. In tech, there is always a bright spot somewhere.

I hope that you have an excellent weekend,

Elaine Moore
Deputy head of Lex