Q3 Review: China’s Tech Crackdown, the Race to Space, and Supply-Chain Difficulties

A Tumultuous Third Quarter Comes to a Close

The third quarter of 2021 has come to a close. The last three months have been tumultuous to say the least. From China’s crackdown on tech companies trading in the US, to supply-chain issues threatening the holiday season, investors and companies had a lot to deal with during the quarter.

Economies around the world also began to see glimmers of hope as more people received COVID-19 vaccinations. However, the Delta variant weighed on this recovery. The world also witnessed two billionaires, Jeff Bezos and Richard Branson, rocket to the edge of space, heating up the competitive space travel industry. Here’s a look at the good, the bad, and the ugly of the third quarter.

China’s Tech Crackdown

During the third quarter, Beijing stepped up its oversight of tech companies trading in the US, sending shares of those tech giants plummeting. Take DiDi (DIDI), the ride-hailing startup which debuted on the New York Stock Exchange at the end of June. China announced an inquiry into the company and ordered that DiDi’s app be removed from app stores. The crackdown on DiDi spooked investors who worried that other Chinese tech stocks trading in the US could also face stricter regulations.

Meanwhile, supply-chain delays, component shortages, rising prices, and labor shortages weighed on industries across the board. Ford (F) and GM (GM) have idled plants, homebuilders have slowed down new construction, and apparel brands are missing out on sales. Analysts expect these supply-chain difficulties to spill over into the fourth quarter.

The Race to Space Heats Up

The quarter will also be remembered for space flights conducted by Virgin Galactic (SPCE) and Blue Origin. The two space companies are in a race to dominate space tourism. In July, a week apart, Richard Branson and Jeff Bezos captured the world’s attention after successfully reaching the outer limits of earth. Virgin Galactic has since announced it is gearing up to launch its first commercial research mission with the Italian air force this fall. Meanwhile, Blue Origin will send two more people on a 10 minute ride to space in mid-October.

The third quarter of 2021 was a complex one. Despite China's increased oversight of the tech sector and supply-chain issues, corporate profits and stocks have held up. It will be interesting to see what the final three months of the year have in store.

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Rising Costs Can’t Stop Corporate Profits From Climbing

Third Quarter Profits Should Be in the Clear

Rising prices, supply-chain bottlenecks, and labor shortages are making it tougher to run businesses. However, these factors have not impacted corporate profits—at least not yet.

Now that the third quarter has come to a close, corporations will begin reporting their results for the three-month period. Wall Street analysts are optimistic heading into earnings season, projecting earnings per share to be up 29.9% year-over-year for S&P 500 companies. On a sequential basis, earnings are projected to decline 7%, reflecting more normal conditions. Actual results annually and month-over-month may end up being better, as analysts tend to be conservative with their forecasts.

Consumers Willing to Pay More

Given the supply-chain issues which are making it more expensive to conduct business, it is not surprising analysts are cautious about third-quarter earnings growth. But based on economic data, companies appear to be taking the increased expenses in stride.

In August, the Labor Department reported that wholesale prices for finished consumer goods increased 4.7% year-over-year, marking the biggest increase in more than 10 years. Prices consumers paid for goods jumped 7.6% last month. While the two data points are not an apples-to-apples comparison, they do indicate that consumers are willing to pay the increased costs which companies are passing on.

Wage Increases Do Not Hurt Profits

Even rising wages are not expected to hurt corporate profits in the third quarter. For the first two months of the just-ended quarter, wages rose 1.8% compared to the second quarter. That is slower than the pace of economic growth and inflation. Wages are also growing at a slower pace than the increases in prices which S&P companies are charging their customers. This is making things difficult for workers, but for now it means that profits for companies are staying elevated.

Still, not every company will be able to keep prices high, especially those in price-sensitive industries. For now, corporate profits seem immune to supply-chain woes and labor shortages. It will be interesting to see what corporations have to say about the past quarter and about fourth-quarter outlook when they begin reporting earnings.

Friday Fundings: Meesho, Multiverse, and Alloy

India Social Commerce Startup Raises $570 Million

India-based social commerce startup Meesho raised $570 million in venture funding. The Series F round, which was led by B Capital Group and Fidelity, values the company at $4.9 billion. Facebook (FB), an existing investor, also participated in the round of fundraising.

Meesho has been benefiting from an increase in social commerce driven by the pandemic. Over the last five months the company has seen order volume more than double. Proceeds from the fundraising round will go to hire employees across its technology and product teams and to expand its online offerings to 50 million items.

UK Apprentice Tech Startup Raises $130 Million

Multiverse, a UK startup which connects companies with people looking for apprenticeships, raised $130 million in venture funding. The Series C round, which was led by D1 Capital Partners and BOND, values Multiverse at around $875 million.

The startup’s CEO Euan Blair is the son of the former UK prime minister, Tony Blair. In January, Multiverse raised $44 million in funding. It aims to address socioeconomic gaps by providing people who did not go to college with access to professional apprenticeships which meld training with paid work. Proceeds from the round will go to fund the startup’s expansion in the US and to add more programs to its roster.

Identity OS Startup for Banks and Fintechs Raises $100 Million

Alloy, a startup which created an identity operating system for banks and fintech companies, raised $100 million in venture funding. The Series C round, which was led by Lightspeed Venture Partners, values Alloy at $1.35 billion. Alloy has raised $150 million in venture funding since launching in 2015.

Alloy operates a platform which enables banks and fintechs to confirm the identity of their existing customers and prospective customers. Alloy has expanded its offerings to include transaction monitoring. Alloy also plans to offer automated credit underwriting in the future. In the last year it has grown to over 200 clients from 90 clients a year ago.