Will the Fiscal Cliff Sink Big Tech?

As time continues to run out on Congress reaching an agreement to prevent us from going over the fiscal cliff, looking ahead to the impact of such an eventuality has become even more important. While much of the focus has been on financial and commodity stocks, big technology stocks are likely to be affected as well. Recessionary pressures have the potential to cause a shift among consumer technology companies like Apple (AAPL 1.27%) and Google (GOOGL 0.55%), particularly if the issues created are allowed to persist. Ultimately, big tech as a whole seems to be more protected against fiscal cliff issues than other sectors, but within the sector, the impact may be meaningful.

The fiscal cliff
In a recent letter to Congress, Treasury Secretary Timothy Geithner wrote, "'I am writing to inform you that the statutory debt limit will be reached on December 31, 2012, and to notify you that the Treasury Department will shortly begin taking certain extraordinary measures authorized by law to temporarily postpone the date that the United States would otherwise default on its legal obligations."' The debt ceiling, while not technically a part of the fiscal cliff issue facing the nation, provides the background against which all other issues must be considered. Essentially, when your credit card is about to be declined, it is less important to agree on which store should get to swipe it.

The fiscal cliff is the term given to the tax increases and spending cuts that are scheduled to go into effect in 2013. While there is still a brief window, as Geithner tells us, the clock is ticking. Most economists, including those at the Congressional Budget Office, estimate that the lack of a resolution will cause a recession with the potential to cost around 2 million jobs. Critical areas of the fiscal cliff changes include the expiration of various tax relief initiatives, and the onset of sequestration cuts in multiple areas.

Beginning in January, several tax abatement measures will end. These include the so-called Bush tax cuts, the extended unemployment benefits, and the end the payroll tax holiday. Sequestration measures refer to previously defined spending cuts that were accepted as a bipartisan initiative to force some needed budget reductions if an agreement was not reached; shockingly, no agreement was reached. As Stephen Colbert explains, "It's like Congress put a gun to the economy's head and swore it will pull the trigger if Congress doesn't put its own gun down." At some level, what is happening is exactly that absurd.

Consumer technology
In the past few weeks, both IDC and Gartner have released reports projecting that the semiconductor market has grown slower than expected in 2012, and will grow slower than expected in 2013. Both cite fiscal cliff concerns as contributing to lowered expectations. An area in which the firms agree is "that smartphones, tablets, set-top boxes and automotive electronics will continue to be bright spots for the industry in the coming years." This bodes well for the two top competitors, Apple and Google.

Gartner sees Apple showing continuing strength moving forward, stating, "The 'Apple effect' is expected to remain pronounced in 2013, helping drive strong NAND and application-specific integrated circuit (ASIC) revenue growth of 17.2 percent and 9.4 percent, respectively. Gartner counts the A4, A5 and A6 application processors from Apple as ASICs, because these are custom processors, designed and solely used by Apple." This is good news for Apple, even despite the fiscal cliff concerns.

Of greater importance to Google, the report went on to say, "Media tablet production is also forecast to grow in 2013, rising 38.5 percent to 207.1 million units, up from the third quarter forecast of 169.8 million units. The success of the Amazon [(AMZN -1.64%)] Kindle Fire, Google Nexus 7 and Apple iPad Mini illustrate the large opportunity for smaller tablets at the right price." Google, which has already exerted its dominance in the global smartphone market, is still playing catch-up in tablets. The increasing acceptance of its most successful tablet, the Nexus 7, is a real positive.

The shift after the cliff
The impact that going over the fiscal cliff may have on each of the above projections is within the framework of the global market. As popular as high-end smartphones have become -- and almost necessary -- they still represent a luxury item in many parts of the world. If a deep recession hits the U.S., it is likely to be a bigger negative for Apple than Google. Android phones cover a much broader spectrum of the price scale, particularly on a global basis, meaning that serious belt-tightening in the U.S. could hurt Apple.

Travis McCourt of Raymond James explains that "there are parts of the world where a smartphone is simply a touch screen with an effective web browser, and in those parts of the world, Android is dominating." China is one of the few parts of the globe not likely to be dramatically affected in the near-term by a U.S. recession, although the central role the U.S. economy plays on the global stage is somewhat inescapable. Should a fiscal cliff recession occur for a sustained period, Google is likely to gain increasing market share unless Apple suddenly decides to compete for the cheaper end of the market.

Another beneficiary, on a relative basis, would be Nokia (NOK -0.81%). The recent announcement of the deal between Nokia and China Mobile (CHL) positions Nokia to pick up significant global market share if recessionary conditions in the rest of the world slow sales. Even the perception that Nokia, and the Microsoft (MSFT 0.37%) OS, are making significant inroads into the race for market share could help both to gain greater acceptance. In this sense, going over the fiscal cliff might be seen as bullish for any player doing well on a relative basis in China.

Ultimately, a U.S. recession is a negative for consumer-driven organizations like Apple and Google, but if these conditions persist, Google and Nokia may benefit. If, on the other hand, a resolution is quickly reached after the first of the year, any sell-off might be seen as creating a buying opportunity in Apple. Big tech is fairly well insulated from the fiscal cliff, but some of the shifts that may occur could be important.