THE TECH THREAT

Stock drop leaves Ireland Inc on the brink,

‘It is time to be more discriminating and to look at individual stocks’

THE tech sector, upon which Ireland is heavily reliant, is wobbling. Share prices fell 10pc over the past three weeks.

Is this merely a temporary blip or the start of something more serious?

It all started on St Patrick’s Day when the Guardian newspaper revealed that political data firm Cambridge Analytica had surreptitiously obtained the personal details of 50 million Facebook users — a figure that has since been revised upwards to at least 87 million. The story unleashed a political and media firestorm with Facebook founder and chief executive Mark Zuckerberg agreeing to testify before the Senate Commerce and Judiciary Committees on Tuesday and the House Energy and Commerce Committee on Wednesday.

This will be Zuckerberg’s first appearance before Congress. Given the depth of the current controversy, it is highly unlikely to be his last.

The Cambridge Analytica caper crystallised long-running fears about how Facebook protects the personal data of its more than two billion users. These fears will have been further increased by last Wednesday’s admission by Facebook that “malicious actors” had taken advantage of the search tools on its platform to discover the identities and collect information on all of its users.

The scammers purchased millions of email addresses and telephone numbers on the so-called “dark web” and then used the Facebook search tools to match those email addresses and telephone numbers to individual Facebook users.

This allowed them to create the digital equivalent of a reverse telephone directory, where one matches numbers with names rather than vice versa.

While Facebook could just about dismiss the Cambridge Analytica affair as being an unfortunate isolated incident, last Wednesday’s admission is potentially much more serious.

Then on March 29 President Trump resumed his long-running feud with another tech giant, Amazon.

In a series of tweets, he accused the company of not paying its fair share of taxes and of short-changing the United States Postal Service, which delivers most of Amazon’s packages in the United States.

The Facebook share price, which had been trading at $184 (€150) before the Cambridge Analytica story broke, fell by 18pc to just $152 (€124) over the following 10 days — it had recovered slightly to $159 by the end of last week.

The Amazon share price also took a knock in the wake of President Trump’s tweetstorm.

Having already fallen by almost 10pc from its March 12 all-time high of $1,598, the Amazon share price lost a further $77 following the President’s criticism, a cumulative fall of $227 or 14pc.

Like Facebook, the Amazon share price has since recovered slightly and was trading at $1,451 at the end of last week.

Dominated by a handful of companies, the so-called FAANGs (Facebook, Amazon, Apple, Netflix and Google), Facebook and Amazon’s problems quickly spilled over into the broader US tech sector.

The tech-heavy Nasdaq composite index, which had peaked at 7,588 on March 12, had fallen by almost 10pc to 6,870 by last Tuesday before recovering slightly to just under 7,100 by the end of the week.

So is this just a spot of local bother confined to only two companies? Or are we on the cusp of something more significant?

“This might not be quite as temporary as it could be. Some of the things at an individual stock level are taking longer to play out,” says Frances Hudson, global thematic strategist, Aberdeen Standard Investments.

“The more important medium-term driver is what happens to interest rates. If everything was going smoothly, the market would have moved on. We were already at a turning point.”

Ireland Inc is heavily exposed to the US tech sector, including most of the FAANGs. Facebook already employs 1,600 people in Dublin’s docklands with plans to double that number over the next few years. This total is dwarfed by Google, which has 7,000 people on its Irish payroll, and Apple, which has 6,000.

Meanwhile Amazon, which already employs more than 1,700 people in this country, has announced plans to build a €1bn data centre at Mulhuddart in north County Dublin.

Of the more than 210,000 people employed by IDAsupported companies at the end of 2017, almost 20,000 were employed in the computer and electronics sector, while a further 86,000 were employed in the international services sector.

Cleary, if big tech catches a cold, Ireland Inc could come down with a bad case of the flu.

“Tech is heavily invested in Ireland. The last couple of weeks has been very tough for the tech industry but we are not seeing any reduction in tech investment,” says IDA Ireland head of technology Leo Clancy.

“Tech isn’t going away. It has become an intrinsic part of our lives. I’m confident Ireland will continue to attract investment as industry models evolve and adapt. Ireland is a proven and well-regarded location which may benefit from increased focus on trust and privacy.”

Even at this early stage, it is clear that Facebook and Amazon’s problems are qualitatively very different.

“Amazon is a logistics business. It also has a cloud business. A company like Amazon has a lot of different strands. It has a much more robust business model [than Facebook]. When it comes to social media platforms, I rather suspect that they may have a limited shelf life. There is also much higher reputational risk,” says Hudson.

Getting slagged off by Donald Trump is not going to seriously disrupt Amazon’s business model, but the data leaks pose a potentially existential threat to Facebook.

Will the latest revelations encourage even users to switch to other social media platforms such as WhatsApp, Instagram (both of which are owned by Facebook) or Snapchat instead?

Still, it might not be good idea to write off the tech sector just yet. In the same week as Facebook and Amazon were being hauled over the coals, music streaming service Spotify had a successful IPO.

Instead of opting for a conventional IPO and employing hordes of expensive investment bankers, Spotify by-passed the investment bankers altogether with a so-called ‘direct IPO’ on the New York Stock Exchange on Tuesday. It didn’t matter. Investors couldn’t get enough of the shares which were up almost 13pc at $149 on the opening day valuing the company, which has never made a profit, at over $26bn.

While the successful Spotify IPO is a warning against calling time on the tech boom just yet, the recent turbulence should definitely serve as a wake up call.

Aberdeen Standard’s Hudson urges investors to become more selective. While those who invested in passive products such as index-tracking funds have benefited from the boom in tech stocks, the Nasdaq composite index more than doubled in the five years to last month, there is no guarantee that tech stocks will keep rising at this rate (see panel above).

“It is time to be more discriminating and to start looking at individual stocks,” says Hudson.

Anyone due to retire in the next few years had better hope that the current weakness in tech stocks is merely a hiccup rather than the start of something more serious.