Over the past decades, California has learned that all of its sun, forward-thinking culture, educated workforce, and entrepreneurial spirit couldn’t stop the gradually accelerating exodus of the aerospace industry from the Golden State. There were many factors involved, of course – but the point is that regional dominance in an industry is not guaranteed in perpetuity against all political, social, and economic changes.
Big Tech and Its Birthplace
California may be starting to learn the same lesson with its hitherto dominant role in the tech industry. The drumbeat of tech news over the past few years has been relentlessly negative: the tale of a public growing increasingly skeptical of tech’s reach and influence, at the same time that that public grows increasingly hungry for tech’s products and services. Each leading tech firm has responded to the resultant political and public pressure in a different way: some more conciliatory, some less; some more political, some less. But the process is still very much in flux, with new regulatory threats emerging, and an increasingly vocal public conversation about how big tech may need to be reined in.
Typically, such a public conversation is challenging for companies’ stock prices. But so far, these dynamics of public and political opinion have had only a minor effect on the market leadership of big tech stocks. In a market that seems perpetually driven by momentum and secular growth themes, tech has remained in demand. Could that change?
Investors should not underestimate big tech’s resilience to its various challenges, and its slow migration from its native habitat in central California is a case in point. Of course not all big tech’s leaders are in Silicon Valley; Microsoft [NASDAQ: MSFT] was born in New Mexico and grew up in its current home state of Washington. Still, the technical, cultural, educational, and entrepreneurial roots of big tech in the San Francisco Bay area are deep. But the challenges are increasing.
Human Talent… And Where It Wants To Live
Apple Park, AAPL’s Iconic Silicon Valley Headquarters
Source: Wikipedia
In July, we wrote about the critical importance of human capital in AI development, which is of course a central theme for the business models of every one of the big tech leaders. We wrote:
“[There is a genuinely] small pool of really top-level talent in critical [AI] disciplines. Those U.S. firms who can afford to win the bidding war for this talent secure it, and in securing it, they intensify the tech status of the U.S. It becomes a destination where both financial reward and the excitement of collegial cooperation and competition are lodestars for a global intellectual and entrepreneurial elite.
“How small is that pool? Take the case of artificial intelligence as an example. While there many be hundreds of thousands of scientists working on AI, most of them are the equivalent of ‘manual laborers’ — they are not the ones making critical developments and innovations. A 2018 analysis using sophisticated data scraping from LinkedIn and analyzing academic conferences concluded that worldwide there are really only about 20,000 PhD-level AI scientists. Of these only about 3,000 are currently open to employment. Closer analysis suggests that only a quarter of these are really capable of top-tier work in which cutting-edge academic research is bridged to an engineering environment where it can effectively be put to work.
“All of this is to say that the competition for real AI talent — the talent that will shape the new world AI makes possible and will fuel the growth of the world’s leading tech companies — is incredibly fierce. (Note to young readers: if you’re STEM-inclined, consider a PhD in an AI-related field.)”
In that piece, we focused on how U.S. big tech is winning the bidding war for talent against foreign tech companies. But this centrality of human talent for big tech’s continued growth is coming up against two obstacles in Silicon Valley. One is that younger tech workers, like many Millennial and Gen Z workers in general, increasingly want quality of life and not simply the highest-dollar salary. That means a convivial built environment, access to recreation, cultural amenities, public services, and more. Most want a relaxed, tolerant, and diverse cultural environment and the social stimulation and ferment that come with it. The San Francisco Bay area used to lead in these areas, but housing affordability and various crises of public welfare are increasingly challenging that leadership. As they try to compensate, big tech is paying higher and higher salaries, and ultimately, rational companies will begin to look for better solutions both for workers and for their salary expense line.
We read recently in The Wall Street Journal that the quest is taking U.S. big tech to what on reflection is a logical destination: Toronto. Intel [NASDAQ: INTC], Uber [NASDAQ: UBER], Salesforce [NASDAQ: CRM], and Alphabet [NASDAQ: GOOG], for example, are all expanding their presence in Canada. The rise of big tech in Toronto has drawn Silicon Valley Bank, a key player in tech venture capital, to open an office in Toronto for the first time. The draw? A congenial urban political and cultural environment for young employees, and an average dollar salary that’s about half the average salary paid to big tech employees in the San Francisco Bay area.
These moves are not entirely welcomed by Canadians, who like many in the U.S. are concerned about big tech’s commitment to privacy (or lack thereof), and also about the effects of tech-driven gentrification and real-estate inflation that could be created by big tech’s presence. Some are also concerned that the presence of big U.S. tech firms will put the kibosh on domestic Canadian tech startups. (We feel that last fear will prove unfounded; on the contrary, the presence of U.S. big tech will probably encourage a flourishing infrastructure of native tech projects in response.)
Investment implications: Big tech is extremely resilient. A day of regulatory reckoning seems to be approaching, but we would not minimize the extent to which big tech will adapt to that reckoning. Similarly, the challenges faced in big tech’s geographical birthplace will not, ultimately, crimp these companies’ capacity to adapt and continue to attract the top cognitive and creative talent that undergirds their success – even if that means moving as far afield as Toronto.
Please note that principals of Guild Investment Management, Inc. (“Guild”) and/or Guild’s clients may at any time own any of the stocks mentioned in this article, and may sell them at any time. Currently, Guild’s clients own AAPL, GOOG, INTC, and MSFT. In addition, for investment advisory clients of Guild, please check with Guild prior to taking positions in any of the companies mentioned in this article, since Guild may not believe that particular stock is right for the client, either because Guild has already taken a position in that stock for the client or for other reasons.
