CIBC Tech & Innovation Market Update – March 2023 – Volume 35

CIBC Capital Markets hosted a one-hour virtual workshop providing expert insights on the structured finance market. Joining T&I’s Asha Soares, Executive Director, CIBC Capital Markets, were industry experts Kareem El Sawy, Founding General Partner, Arrow Capital, and Jonathan Ziebeth, Managing Director, Sixth Street Partners.

Last year, the SEC unveiled plans to standardize climate-related ESG disclosures, with final details expected in April 2023. The Scope 3 emissions (which include all indirect emissions that occur in a company’s value chain) disclosures are generating some discussion, with the SEC deciding between two options: 1) detailed reporting requirements; or, 2) a more open-ended standard that relies on materiality. While ESG advocates argue for detailed Scope 3 reporting, many corporates are concerned that restrictive Scope 3 rules will significantly increase reporting costs and add operational complexity. Despite comparatively strong ESG rankings, the tech sector has room to improve its Scope 3 disclosures, with our recent ESG report highlighting that only half of our tech coverage has environmental disclosures and only 30% have communicated net-zero commitments.

With the global economy slowing down and tech valuations having come back down to earth, some investors are searching for additional ways to generate returns in the tech sector. In 2022, Bloomberg noted a 74% increase in activist engagement involving tech companies, with 32 tech sector shareholder activism campaigns registered in Q4/22 alone. While H1/22 tech sector activism mainly focused on hardware companies given supply chain challenges, recently the focus has shifted towards software firms. Most notably, multiple activist investors have built positions in CRM giant Salesforce, including a multi-billion dollar stake by Elliott Investment Management. Specific details of the activist campaigns against Salesforce haven’t been made public, but the company is facing a number of challenges including the departure of co-CEO Bret Taylor, a 10% reduction in headcount, and macro-related pressure on IT spending that has resulted in the company declining to provide 2024 guidance.

ChatGPT has captured the public’s attention since its unveiling last November, surpassing Bitcoin to become one of the most Googled terms in 2023. The frenzy is leading to accelerated AI investments, with PE investing $2.65B in AI in 2022, up 70% Y/Y. However, regulatory and ethical questions remain. While ChatGPT is uncanny in its ability to provide encyclopaedic answers in a conversational format, it often provides falsely confident answers to opinion-based queries. AI technologies also have the potential to promote bias and misinformation, not to mention the myriad of other ethical considerations around its usage (e.g., the use of AI to generate your child’s homework).

Q4 earnings from the U.S. tech giants have been generally well received by the market, as the overall demand environment remained resilient in the quarter with revenue in line with expectations. On profitability, earnings have skewed somewhat to the downside as inflationary pressures persist, leading to EBITDA that was on average 3% below Street. The global demand outlook and forward guidance have also been a focus of quarterly calls, with some management teams striking a cautionary tone while others see the environment improving. Another common theme in the quarter was layoffs, with the majority of Big Tech having announced workforce restructurings.
Similar to Q3, we saw outsized market reactions on earnings misses and beats. SNAP was down 14% post earnings, given worsening competitive headwinds and widening losses, while Meta opened up 20%, on the strength of better-than-expected revenue and a constructive 2023 outlook.

While ChatGPT has mesmerized the internet with how well it can mimic human responses on virtually any topic, by design the platform and others like it, such as Bing Chat and Google Bard, have one detractor – factual accuracy. Whether it is from transformer architecture’s bias or erroneous decoding, their language models are very prone to AI hallucinations, a term coined to describe instances where the model seemingly makes up facts. In a world where misinformation can influence public health, political stability, and social cohesion, the detractor is a major one.

What’s happened to the tech workers after they’ve been let go? Danielle Abril of the Washington Post has found they often leave the industry entirely and are finding fulfillment in pursuing their passion projects or lifelong dreams – whether it’s opening a skincare business, bartending, or writing their first fantasy novel.

The vegan community has not yet fully embraced lab-grown meats for the fact that they still contain animal products. As lab-grown meats become more available as cheap, eco-friendly protein options that offset animal consumption, it may change what it really means to be vegan.