 From theCUBE Studios in Palo Alto in Boston, bringing you data-driven insights from theCUBE and ETR. This is Breaking Analysis with Dave Vellante. The financial services industry has always been a leading consumer of technology. And we often talk about data products. Well, financial firms have been building data products for decades. In a lot of ways, these firms are essentially IT shops that package and sell financial products. So the recent crisis is undoubtedly going to impact tech companies that have exposure to banks. Now, the puzzle that we have to solve through our analysis is that many of these overly exposed firms are also playing in critical sectors, such as cloud and cybersecurity. So the question is, are such companies semi-immune to banks getting hit by tightening IT spend? Or does their exposure signal icebergs ahead? Hello and welcome to this week's Wikibon Cube Insights powered by ETR. In this Breaking Analysis, we squint through the myriad data points and try to answer the question, which tech companies are the most exposed to the banking crisis? We'll review how we got here and what it means for tech and then we'll dig into the ETR data and try to highlight which companies are red, yellow or green specifically in the financial services sector. All the banks, they're off in sympathy to the crisis of confidence that's occurring. Most big bank stocks are off 20% or more in the past month. JPMC is the exception, they're off low double digits. And we didn't put First Republic on this chart because they're off almost 90% and it would really scrunch everything together. But the NASDAQ is up in the past 30 days because investors are flipping out of banks into tech on the bet that the Fed will actually begin to loosen its grip on interest rates. This year, in fact, 2023 is what the market is now all of a sudden expecting. What a turn that was. This is especially benefited large cap tech stocks that have broad industry exposure, not so much exposed to financial services even though they play there. They got lots of cash and perhaps investors feel like they were oversold and they've become kind of the safe bet, ironically. Now the picture in the banking sector, as you know, has been really ugly. We've seen five bank bailouts this month starting with Silvergate, then SVB, signature bank, then First Republic, which was saved by a giant $30 billion loan from several large banks, including JPMorgan Chase, Wells, B of A, and Citi. Now it debated last week on the Cube pod with John Furrier as to whether this was a bailout and I would say now, after thinking about it, it was because that $30 billion didn't come from bank faults, it came from the US Treasury. Anyway, I digress. In a bit of a forced marriage, credit Suisse, a very poorly run bank by all accounts was absorbed by UBS under exceedingly favorable terms provided by the Swiss government. And just today Deutsche Bank got crushed on fears that the financial exposures on their asset portfolio are uninsurable. You know, it seems like every crisis brings new terminology that goes mainstream. Like during COVID, it was herd immunity and asymptomatic and contact tracing. And here, in this case, with the bank crisis, we have mark-to-market duration risk and moral hazard. The former two generally referring to the delta between what a bank's bond portfolio is worth on paper and the value at maturity. The latter implying that the Fed kept interest rates low to spur economic growth, try to help everybody while ignoring the potential risks. So how is it that after the 2008 financial crisis, where more new words like credit default swaps and quantitative easing and stress tests were introduced, that we ended up in this current mess? Well, it's quite a story. And we're not economists, but sometimes I feel like we know just as much about potential negative consequences as do the most educated economists in the world. For example, I remember I was at an MIT CFO conference in the early fall of 2007. And the guest economic expert was asked if he felt mortgage defaults and poor quality loans were a risk to the economy. And he unequivocally, he said, absolutely not, there's no evidence in the data that suggests this is a risk at all. Well, we know what happened when subprime mortgage is imploded. So here's a 2019 graphic from a guy named Lance Roberts, an analyst at RAI Advisors. It goes back to the beginning of the modern easy money time period, which started with quantitative ease in QE1 as a novel idea introduced by the then Fed chairman, Ben Bernanke. For the first time in history, the Fed began purchasing bonds and other financial assets from banks to inject capital into the system. The idea was by doing so, the banks were going to start lending money again to small businesses and consumers. Well, the Fed didn't really game it out. Somehow it never dawned on them that the banks are profit-driven and they could make more money and make safer bets by investing those dollars in the financial assets that would give them a guaranteed return. So they essentially bought up the same assets that they just sold to the government because the government was backing them and they knew they were just going to go up. This sparked President Obama to rail against big bank CEOs in 2009 when Main Street was still struggling, but Wall Street was backtaking bonuses and whining their pockets from that taxpayer debt. But eventually QE started to work and the economy slowly came back. And in 2010, started its epic bull run. And the thinking by many was that once the economy was back on track that the Fed would back off and let the markets figure it out, that market forces deal with themselves, but markets were hooked on easy money by that point. And as you can see in the chart, the brown line is the S&P and when the market dipped, it's like every time it dipped, the Fed would step in to pull the levers and print more free money. So in 2012, they even launched something called Operation Twist, which Operation Twist was a monetary policy strategy that central banks used to stimulate growth by lowering long-term rates. How you ask? Well, they would sell near-term treasuries to buy longer-term maturity ones, ones with longer-term dates and that kept interest rates low. Now, despite the fact that the economy seemed to be back on track, it was apparently decided that what's good for the stock market is good for America and the free flow of money continued. President Trump then took office. That, of course, fueled markets because people thought he was business-friendly and then he appointed Jerome Powell, the current Fed chairman, who when he began to taper after being on the job for a little bit, he began to taper the balance sheet, that blue line there. Well, that caused what was referred to as a taper tantrum. In other words, the market didn't like it, so everybody started crying. Trump railed against his appointees' rate hikes and said, quote, the Fed has no clue. Then he tweeted out and he was doing the Trump thing. And so the Fed capitulated to the market, but as you can see by the red dotted line, that was the projection of the Fed's balance sheet trajectory at the time. Now, Roberts back in 2019 appears he was a bear and he said he didn't know when it was going to happen, but he was certain that an incident would occur which would cause the Fed to act again. Well, he didn't predict the pandemic, but he sure was right. And we all know the story and we've overlaid the Fed's actual balance sheet trajectory which dramatically veered from the pre-pandemic expectations on the previous chart. So the Fed caved to Trump and the markets, the pandemic hit, prompting the Fed to print more money under Trump and then later on under Biden, President Biden got more fiscal stimulus past the $2 billion plus package in the form of Build Back Better and shockingly inflation turned out not to be transitory which of course the Fed chairman said it would be. So that was a miss. So the Fed went on an historic tightening vector to catch up and when rates rise, so do borrowing costs which reduce demand among banks and other financial institutions to borrow money. It increases their cost and it crushes their bond portfolios, especially those with long maturities. That's of course what happened to SVB. They didn't mark to market and so they were hiding that in plain sight. Anybody who did their research could have seen it. And it turns out that the stress test for regional banks failed to consider the impact of rising interest rates on bond portfolios and that's how we got to where we are today. Now unfortunately the picture is still not pretty and many argue that we missed an opportunity during the good times to invest that cheap money for the long term or maybe even chip away at the debt. Instead the government racked up more debt and here's the debt clock. One of my favorite websites despite the fact that it makes me want to cry. US national debt is now over 31 trillion. By the way, the debt is up over a billion dollars since I snapped this picture at 10 a.m. Eastern time. It's just a little after three o'clock right now. US debt, check that one out is up now 120% of GDP up from 59% at the beginning of the millennium. Interest on that debt is now over 547 billion dollars as of today and keeps ticking up. Now the math to fix all this is really simple. You can see that sort of the big threes. You've got to stop spending more than you bring in and cut defense, no security, Medicare but that's not going to happen. So, so far we've just talked about the debt of the federal government and when you add in households, state, local debt, financial institutions, et cetera, et cetera, all this private debt, the debt adds up at 95 trillion. It's going to be 100 trillion soon. By the way, it's up $2 billion since I took this snapshot earlier this morning. One other little ratio worth noting on this chart in the bottom right. And there are many, I'll put this link in the post and you should check it out. It's actually amazing work to behold. But any rate, the M2 money supply is now only 19 times the market cap of all crypto. And that's up from 9,522 X in 2013. What does that tell you? Ping me what you think it means. Okay, moving on. So the premise here today is banks are going to spend less on IT in the coming quarters until things shake out a little bit. So let's get into the ETR data and see which companies have the greatest exposure to financial services. First, let's look at the composition of the quarterly TSIS Technology Spending Intention Survey from ETR. It's a survey that goes out to more than 5,000 IT decision makers. This quarter survey is currently in the field and it's going to end up, it's got 1,300 now. It's going to end up with over 1,500 responses as it typically does. And it's going to represent about $700 billion in tech spending. Now these respondents are senior people. They've been vetted by ETR. They're real people. They've got spending visibility. Now it's weighted here, as you can see towards larger companies. Okay, but they got the big budgets and it's got a North American bias. But it is cross industry and you can see 14% in the bottom left in those bars. 14% of respondents are represented in the financial services slash insurance industry. Now with that out of the way, let's look at the companies in the survey. So as always I consulted with ETR's Eric Bradley on this topic and we have some very interesting data to share. This first chart shows companies in the survey and what we did is we sorted by the number of N within the financial sector, that green highlighted area. So these are the companies in the survey that have the most responses, respondents within the financial services sector. And then you see in the left, you see the company in the first column, the total N in the overall survey. So this is everything outside of financial services, all those industries that ETR tracks, the total N and the percent of that that comes from FS. Then on the right, you see the right hand side of the chart, you have net score. Net score is a measure of spending velocity for a company's products. It essentially takes the net number percent of customers, net percent of customers that are spending more. And it does so with a very granular and proprietary methodology that we've talked about a ton on breaking analysis. So you see that net score and then you see the year over year change and the sequential change from last quarter survey. Okay, so what stands out in column three is Splunk at 21.2%, F5 at 20.3% and CrowdStrike at 21% have the highest exposure to FS within the top 20 in terms of financial services citations that we've sorted here in this view. We've got some other views to show you. Now, moving to the right hand side, you can see Cisco's net score drop 12 points in financial services, but it's up, that's year on year, but it's up quarter to quarter. So that's not so much of a concern. It's actually a positive. Same with AWS. Maybe not as positive, but it's net scores down 12% year on year, but it's flat sequentially. So it's already in the numbers. Splunk is a concern because it's net score in financial services tanks year on year and it's down 15 percentage points sequentially. Zoom and DocuSign, both appear to be exposed while ServiceNow, Palo Alto, F5 and CrowdStrike are penetrated in FS more highly than the survey average of 14%. Their sequential net score, however, is mixed. It looks like ServiceNow is softening a bit while the others are flattish. Dell as well looks soft, but it's exposure is well under the survey average and it's likely PC related. Now, as we said at the top, cybersecurity is still the number one priority amongst IT buyers. So it's possible that several of these companies may not feel the pinch, particularly Palo Alto and CrowdStrike, which both have strong business momentum based on their last quarter and have a portfolio large enough that they can consolidate redundant vendors, which could be an opportunity for banks and financial services companies to continue to cut costs. We'll see. Splunk looks to be a real concern to us in the sector and may be more exposed. We'll see how it plays out in the next earning season, but it's something to watch. Now let's take another cut at the data. In this view, we sort on those companies that have the highest percentage of their total citations. In other words, the percent of the total that's in financial services, that's that green highlighted area. We also filtered out any companies that had an N of less than 100 in their total responses within the survey, not within financial services. So we took out any company that didn't have at least 100 responses in the total survey. So we wanted to get some of the companies that had pretty good presence and pervasion in the survey. So you see Dynatrace, SalePoint, and Informatica stand out as all three are highly exposed in financial services within the survey and each is showing steep year to year and sequential net score declines. Now, Cloudera is highly penetrated, but they're flat quarter to quarter. CyberArch appears exposed in financial services, but sequentially its net score is flat. Now, Click has filed a confidential IPO and is acquiring talent and it's in the mid stages of a total makeover as a private company. So I'm guessing there's some old DNA in this survey and it doesn't reflect the new momentum the company will likely be touting at IPO and the whole talent acquisition and that has yet to take shape. They're a private company. We haven't seen their numbers yet because it is a confidential filing. So we'll have to dig into that once that becomes public. So I don't put too much weight in Click. I want to be careful there in this survey. DataDog looks to be bouncing back with a seven point uptick in its net score sequentially but Koalas looks to be taking some hits down 35% year on year and its net score is down 9% sequentially. Ouch. Now to caution you, these are snapshot data points and we'll have to go back and see these companies fair at earning season at least the public companies will be able to gauge. Now the last one we'll share is some of our favorite names that we often talk about in breaking analysis episodes. Here's a semi random selection of companies that we follow and have highlighted in the past several years that have an FS mix higher than the 14% survey average. We talked about Cloudera already. Mongo not surprisingly has a higher than average mix of business in financial services within the survey and it looks to be down sequentially although holding up year on year. Elastic is way down year on year but flattish sequentially but look at workday up 11 points in net score year on year and 10% sequentially. What banking crisis? Snowflake as we reported is way down year on year from its stratosphere but that 26 point drop in financial services is notable but it's flat sequentially. So again, it's already in the numbers. Now Databricks is really interesting despite the concerns that we raised last week. Its net score in financial services is a whopping 76% much higher than its net score overall which is comparable to Snowflake's 50, you know, high 50s. So Snowflake in financial services is very close to its overall average. Databricks stands out in financial services much, much higher than its average is the point there and Databricks is up 20 points year on year and four points sequentially. This is likely due to the fact that many financial services customers are very sophisticated when it comes to data and that aligns well with Databricks offerings. Service now we discussed already but look at Kubernetes and it's not a company we know and it still has an elevated 65% net score well above our benchmark that we consider elevated which is 40% there at 65% but it's down 12 points year on year and 15 points sequentially within financial services. And Nutanix, the n is smaller, I think it's 26 and they've got a mix that's only slightly above the survey average nonetheless as a negative net score that's off 51 points year on year. Wow, and 11% sequentially. So something to watch there. Okay, so very data heavy episode today and we'll take a look back when earnings hit to see how predictive the survey data is but let's wrap up with some things that we want to watch. Unfortunately it seems policymakers line up along partisan lines except when they're trying to appear tough on China and CEO of TikTok is in front of them but this means that Congress can't be expected to pass legislation that will for example ensure deposits over $250,000. That requires lawmaker action or systemic risk and Treasury Secretary Janet Yellen has been sending mixed signals and kind of hedging on that front. And so that has the market's concern. I mean, she can't say they're going to act because it's really up to Congress to act and or she's going to have to defend, you know, the fire alarm, the systemic risk call. So she's got to be careful there. Look, the Fed's job is to make sure that the economy functions well that inflation and unemployment are under control. Well, right now those two forces are counterposed and they're essentially at odds but the Fed has to act like the lawyer in the courtroom when something bad happens. They got to act like they knew it was expected even if they have no clue. The challenge with the Fed frankly is it's data driven but the data are questionable. Inflation, flagging indicator and it's unclear what impact rate hikes have really had on inflation but one can only surmise that they're serious and the economy is eventually going to feel it and one could argue that this is a symptom. The banking crisis is a symptom of these rate hikes. In fact, it's pretty clear that's the case. So this is why the market is actually kind of shrugging off the recent rate hikes globally because it thinks the Fed is going to ease this year. We also have to watch valuations and earnings, real earnings, not the earnings estimates. Right now the NASDAQ is trading at 22 times projected earnings which is off its 35x high which was during the boom but like the Fed, the CEOs and CFOs of tech companies they got less visibility right now. You know, they're guiding conservatively but are they conservative enough? And as negative as we've been on the economy the last point is on the economy, the government, et cetera, the Fed's track record, the free money era and the market overall and financial services. I'm an optimist. I mean, technology is deflationary and the wild card here is AI and automation. AI in our opinion will create a productivity boom and I believe like the Google IPO gave birth to rebound in tech after the dot com crash, AI is going to do the same thing. Yeah, it might get a little bubble issues, might be confined for a while and but the markets right now could use a little sustained positivity. I do think it's going to get worse before it gets better. I think it's going to take a while for automation and AI to show up in the productivity numbers but I really believe it will and that will positively affect earnings. Might take a couple of years, might be some pains in terms of jobs that get replaced by AI but within five years every job is going to be AI powered so you got to figure out how to take advantage of AI and how to be creative with AI. You're not going to protect the past from the future so but seriously I think it could take a couple of years here but I firmly believe the best is yet to come in tech. All right, we're going to leave it there. I'd like to thank Eric Bradley and the team at ETR for feeding us with some amazing data that was really relevant to the times thanks to Alex Meyerson who's on production and manages the podcast, Ken Schiffman as well here in our Boston studios, Kristen Martin and Cheryl Knight help get the word out on social and in our newsletters and Rob Hof is our editor-in-chief over at siliconangle.com thank you all. Remember all these episodes are available as podcasts wherever you listen all you have to do is search Breaking Analysis Podcasts. I publish each week on wikibon.com and siliconangle.com don't forget to check out thecube.net for all of our events. You can get in touch email me at david.volante at siliconangle.com or DM me at dvolante or comment on my LinkedIn posts and please do check out ETR.AI for the best survey data in the enterprise tech business. This is Dave Vellante for theCUBE Insights powered by ETR. Thanks for watching and we'll see you next time on Breaking Analysis.