Is this the end of the Silicon Valley Myth?

Matthew Gordon, CFA

Jan 25, 2023

Is this the end of the Silicon Valley Myth? image

We received a question from a client recently about a story in The Atlantic by Brian Merchant, titled “The End of The Silicon Valley Myth.” Our client asked us, “Should we be worried that Silicon Valley is in decline?”

We shared with our client that, while we are sympathetic to some of Mr. Merchant’s concerns, we disagree with most of his conclusions. The article argues:

  • Tech companies aren’t innovating. “You can just feel it, the cumulative weight of this stagnation, in the tech that most of us encounter every day. The act of scrolling past the same dumb ad to peer at the same bad news on the same glass screen on the same social network: This is the stuck future. There is a sense that we have reached the end of the internet, and no one wants to be left holding the bag.”
  • Tech companies can’t compete. “The bluster did accomplish what the company’s metaverse was built to do in the first place, though: distract us from the fact that Facebook’s user growth has slowed to a crawl, that the platform is losing ground to TikTok, and that it’s mired in controversy and moderation woes. With each passing day, Facebook’s metaverse aspirations look more like a Hail Mary fantasy, a beleaguered CEO’s escape attempt to a 3-D virtual world where he might leave behind the misery of his dull 2-D version.”
  • Tech companies exploit labor. “Aside from renting out more access to its web infrastructure, Amazon’s road to perpetually expanding profits lies in opening more fulfillment centers and working more employees to the bone using sophisticated and punitive surveillance and productivity systems—a proposition that is running up against a rising labor movement, a tight employment market, and a public that supports union drives at Amazon by overwhelming margins.”
  • Layoffs are a sign that tech companies are in decline. “[Meta] has lost hundreds of billions of dollars in value this year. It laid off more than 11,000 people, or 13 percent of its staff, in November. It’s not just social media that’s in decline, already over, or worse.”

While the headline is well crafted to grab attention and the author’s arguments have strong emotional appeal, particularly with a certain segment of our society that blames technology companies for problems like wealth inequality and the rise of political extremism, we think Mr. Merchant misunderstands much about how Silicon Valley companies operate and their current standing.

  • Innovation is alive and well in Silicon Valley. The AI-based Large Language Models that Mr. Merchant derides in his conclusion have tremendous potential to let us learn, create, and work more effectively, freeing up time for us to spend however we see fit. These models were first developed by Google and have spurred the creation of new companies, most notably OpenAI, the creator of DALLE and ChatGPT. We are excited to see what innovations these models unlock. None of this would be possible without innovation in semiconductor design at companies like Meta, Google, Nvidia, and AMD, nor without breakthroughs in semiconductor manufacturing techniques from companies with strong Silicon Valley ties like ASML and Taiwan Semiconductor. Self-driving cars developed in Silicon Valley are already offering transportation services in major American cities, and electric vehicles built in Fremont have spurred auto OEMs around the world to develop their own EVs.
  • The challenges facing Meta are not a sign that tech companies can’t compete, but rather a perfect illustration that competition still exists and benefits us all. The decision by Apple to disrupt the advertising ecosystem with new privacy policies and the rise of TikTok has spurred Meta to invest tens of billions per year to develop new AR/VR services and improvements to their existing Facebook, Instagram, and WhatsApp products. In the most recent quarter, Meta reported user growth in all regions, better-than-expected revenue, and growth in their Reels service that was much faster than TikTok. Billions of people continue to see value when using Meta’s services for communication, entertainment, and commerce every day. When companies compete to offer better services, we all win.
  • Tech companies do not exploit labor. Companies like Amazon offer some of the highest entry-level wages (more than $19/hour in fulfillment centers) and benefit packages (tuition reimbursement for hourly employees) in America, across all industries. While the Staten Island fulfillment center did vote to unionize, no other facility has voted to unionize, suggesting most Amazon workers don’t believe they are exploited or would benefit from collective bargaining.
  • Layoffs are not a sign that Silicon Valley businesses are struggling. During the first year of the pandemic when demand spiked for services that enabled many to work remotely and make more purchases online, tech companies accelerated hiring, in anticipation that much higher demand would persist once the pandemic receded. However, as demand for many tech services and e-commerce solutions has reverted to pre-pandemic trends, it has become clear that companies hired more people than they needed, making many overstaffed and inefficient. For example, between Q3 of 2021 and 2022, Amazon increased their corporate headcount by 75,000 (+27%), Meta increased headcount by 19,000 (+28%), and Alphabet increased headcount by 37,000 (+25%). So far, each of these companies is laying off fewer employees than they added over the past year. Amazon announced plans to lay off 18,000 employees, Meta announced 11,000 layoffs, and Google has announced 12,000 layoffs.

We are fortunate to live in the Bay Area, where we see the optimism and innovation in and around Silicon Valley every day. It is this optimism and innovation that drives our country forward and creates prosperity that benefits us all. Let’s not lose sight of that!

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The securities identified and described do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable.


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