Over this weekend I have had a tremendous privilege and opportunity to attend and present my research at the Society for Neuroscience Conference in San Diego, California. This is the annual conference for neuroscientists around the world to attend and present cutting edge research. It is also a place where companies in the healthcare/ lifescience research industry advertise themselves to the science community. These companies range from self-funded startups to multi-national corporations with hundreds of billions in market capitalization. What I found very common from these companies is that all of them are hiring. However, as I talk to the hiring reps from these companies, I keep getting notifications on my phone about lay-offs, hiring freezes at mega-cap technology companies. I see a tale of two cities: a winter for the technology industry and a blossoming spring for the healthcare/ life sciences research industry.

A Hibernating Winter For Tech

Let's re-visit some major news that came out of the mega-cap technologies over the past few weeks as the third quarter for corporate earnings season is winding down. Meta, the parent company of social media platforms such as Facebook, Instagram or WhatsApp, announced the laying off of 11,000 staffs, equivalent to 13% of its workforce. This is the first time ever in the company's history to be cutting jobs, after decades of workforce expansion. "We are also taking a number of additional steps to become a leaner and more efficient company by cutting discretionary spending and extending our hiring freeze through Q1" said Mark Zuckerberg in his letter to employees to announce the jobs cut decision.   

The direction of cutting jobs/ slowing hiring/ reducing spending is not unique to Meta. If you google the name of any of the big technology companies plus the word "layoff," you will almost always find a recent article either reporting layoffs that have already happened or layoffs that are being hinted at by managements (and even Google itself is not an exception). Regardless of what the tech company specifies in, be it social media, digital advertising, cloud, software or semiconductors, the consensus amongst executives has been to cut costs. Why is that? There are a few reasons, but the elephant in the room is the looming economic recession, one many argue that the technology sector has already entered. Simply put, tech companies are seeing slow to negative revenue growth, a challenge they have not seen in years. For example, the tried and true heavy-weight tech company like Microsoft is seeing the slowest revenue growth in 5 years. Meta is actually seeing their year-over-year profits being cut in half. As a result, these companies have to cut expenses in the forms of job number, salary, or research & development funding. 

Note that above I only talked about big, profitable mega-cap technology companies. If they are experiencing hardship, don't even think about how hard it is for small, non-profitable tech companies. A Snapchat made $1.1 billion in revenues in Q3 2022, but net they lost $0.3 billion (due to having higher costs than revenues). Year-over-year, the loss has actually quadrupled, as this time last year their operating loss was $0.07 billion. Clearly, the company needs to turn this number around, either by increasing revenues or reducing costs. It will very likely not be able to do the former, because the macro-economic conditions are very challenging. Therefore, they have to focus on cutting costs. This explains why in September, Snapchat laid off 20% of their workforce. 

A Blossoming Spring For Life Sciences/ Healthcare

The same cannot be said for companies in the healthcare or life sciences research sector. According to the US Life Science Employment Pulse Report, life science employers posted 578,402 job advertisements in the third quarter. That’s up by 12% from the prior year. While the phrase "cutting spending" is very common in the tech world, we haven't heard that phase in the life science/ healthcare world. WIC portfolio holding Eli Lilly, an Indiana-based pharmaceutical company, recently even revised up their operating expenses guidance for financial year 2022 by nearly 16%. While this doesn't exactly lead to a 16% increase of workforce, the direction is clear: executives see a clear path ahead to increase investments in order to grow the business. In another example, I met with Thermo Fisher, a manufacturer of equipment, instruments, reagents, software and services for research and manufacturing in the pharmaceutical and research industry. The representatives there told me the company is hiring like crazy. Look at the company's third quarter earnings results for some numbers, I found that during the third quarter of 2023, the company increased its operating expenses by 27%. Again, while this doesn't exactly mean a 27% increase in jobs, it indicates the management's confidence in continuing to spend and grow the business.  

Capital Markets Have Seen This Coming

The stock market has sniffed out this tale of two cities from a long time ago. Year-to-date, the S&P 500 Information Technology index (which tracks tech stocks such as Microsoft, Apple, Amazon, ...) is down roughly 24%. On the other hand, the S&P 500 Healthcare index (which contains the Eli Lilly and Thermo Fisher that we talked about) is only down 6%. This means healthcare/ life sciences stocks on average have been outperforming the technology stocks by 18%.

The hiring from healthcare/ life sciences companies versus the firing from tech companies is not the direct cause for the outperformance of the former group. The reason is that the healthcare/ life sciences companies have been earning better on a relative basis. For example, while a Microsoft has only grown earnings by 3% year-over-year, an United Healthcare (health insurance corporation) will see its earnings picture growing 16% year-over-year. 

Bottom line, I like the healthcare sector much more than the tech sector. You can see I put money where my mouth is too. Our portfolio is 18% tech, which is significantly underweight compared to the weighting of tech in the S&P 500 of 26%. On the other hand, we own 22% healthcare, which is significantly overweight compared to the S&P 500's 15.30%.