Busting the myth: Scalability of Tech cos.

Hello, and welcome to a new edition of Trendline!

Before we dive in, I’m collecting some information about this newsletter’s readers so I can make more relevant content. Pls take a moment to answer (its completely anonymous)

The popular narrative is that Tech companies (by which we mostly mean digital tech like software) are infinitely scalable.

Once a company develops software or a software-enabled service, then it can reach millions of customers overnight without adding too much overhead (i.e. people)

While theoretically that’s possible, the reality is a lot different.

Companies have to do a lot of other activities too:

• Finding customers (marketing)

• Convincing them to buy (sales)

• Dealing with all things money (finance)

• Hiring, training employees, managing payroll etc. (HR)

• Building new software and maintaining existing ones (Product / Engineering)

… and a whole lot of other things needed to run a company.

All these activities require people - sometimes a lot, depending on the kind of business you run.

This is what we see in today’s chart as well.

I divided the companies in the popular Nasdaq-100 index (which has a lot of IT companies) into different industry sectors (using the GICS classification) and computed their annual revenue per employee.

There are 39 IT (Information technology) companies in the Nasdaq-100, mostly those who sell some combination of software and software enabled hardware / services.

Contrary to popular belief, these companies, on avg., don’t generate very high revenue per employee.

Infact, the avg revenue per employee for IT companies is lower than companies in Utilities and Healthcare sector (e.g. Gilead, Amgen) and only slightly higher than Consumer companies (e.g. Monster Beverages and Costco)

Communication Services is an interesting category as it is mix of traditional network companies like T-Mobile, gaming companies like EA Sports and 3 Big Tech giants - Google, Meta and Netflix. While the 3 Big Tech companies drag the sector avg. up, the company with the lowest avg. revenue per employee (Charter Communications) still has higher revenue per employee than the avg. IT company.

Within the IT sector, best-in-class companies like Apple stand out. While outsourcing of device manufacturing keeps their employee base low, they still build their own software and deserve credit for being more efficiently run than most pure-play software companies.

That’s all for this week. Thanks for reading! 👋