Elon Musk’s DOGE spending axe is hanging over technology stocks
Bloomberg |
Apr 03, 2025 06:07 PM IST
Elon Musk’s efforts to slash $1 trillion in federal spending adds another risk for battered tech investors.
Elon Musk’s efforts to slash $1 trillion in federal spending adds another risk for battered tech investors, threatening to sap billions in revenue from an already precarious sector.
Tesla CEO Elon Musk attends the opening of the Tesla factory Berlin Brandenburg in Gruenheide, Germany, March 22, 2022.(AP)
Tesla CEO Elon Musk attends the opening of the Tesla factory Berlin Brandenburg in Gruenheide, Germany, March 22, 2022.(AP)
Major companies like Microsoft Corp., Automatic Data Processing Inc., Autodesk Inc., SAP SE, and Oracle Corp. are among the companies that could be impacted by cuts in government spending, given the benefits they have historically gotten from federal contracts. Last month, the Department of Defense said it will terminate a plan to use Oracle software to manage its civilian workforce.
The cuts add to the complexities for investors already contending with the impact of President Donald Trump’s announcement of steep trade tariffs, which have sent shockwaves through the global economy.
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It is difficult to estimate how much revenue might ultimately be at risk, but the US government is a notable customer and investors are watching warily. Close to $40 billion in software and public cloud services are expected to be consumed or purchased by the federal government in 2025, according to an analysis of IDC data by Bloomberg Intelligence analyst Niraj Patel.
“If you’re a company with government exposure, investors don’t know what kind of growth to expect, and they’re going to be less willing to pay up for what it might be,” said Damian McIntyre, portfolio manager and senior quantitative analyst at Federated Hermes, referring to Musk’s cost cutting drive.
The IT services company CACI International Inc., for example, gets nearly all its revenue from the government, and Science Applications International Corp, said that 98% of its fiscal 2025 revenue is “attributable to prime contracts with the U.S. government or to subcontracts with other contractors engaged in work for the U.S. government.” Both are down more than 20% since the election.
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Accenture Plc, meanwhile, gets nearly 8% of its revenue from the U.S. government, according to supply-chain data compiled by Bloomberg. The IT consulting firm singled out Musk’s Department of Government Efficiency, known as DOGE, as a factor behind weak results last month. Its peer, Gartner Inc., has said that about $1.2 billion of its outstanding revenue contracts were attributable to government entities, and the company’s government exposure was recently cited as a concern by UBS.
One name that has held up better is International Business Machines Corp., which JPMorgan wrote “could prove more durable” than Accenture; it is also seen as a winner in the spending boom around artificial intelligence.
DOGE has fallen far short of Musk’s initially-stated goal of eliminating $2 trillion in US federal spending, and the efforts have been riddled with errors.
On Wednesday, Politico reported that Musk may step back from his quasi-governmental role and return to managing his businesses. While Musk denied the report, several of the hardest hit companies bounced on the news, with CACI closing up 5.8%.
Still, many agencies are pursuing aggressive cost cuts apart from DOGE, and Musk has claimed he is on track to eliminate $1 trillion in spending by the end of next month.
Software stocks could be broadly affected as reductions in government spending potentially impact education, health care, business services, travel, and other segments, according to Bloomberg Intelligence. ServiceNow Inc. is seen as particularly vulnerable to a slowdown in new contracts, as the company gets 11% of sales from the public sector, a high percentage among peers, according to BI.
Earnings for software and services companies are forecast to rise 11.6% in 2025, according to Bloomberg Intelligence data, down from the 12.3% pace that was expected in early February. Revenue estimates have also trended lower.
“People who want to invest in these kinds of companies probably need to go in with a certain amount of apprehension,” said Sean Brehm, chairman of Spectral Capital. “Some contracts will continue, but we don’t have the whole picture yet, and that means we’re in limbo.”
Elon Musk
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