High valuations that the big tech stocks enjoyed in the low-interest rate environment seem to be over now. The macroeconomic factors seen after the Covid-19 outbreak are no longer persistent and relevant. Inflation has hit the ceiling, the US economy is seeing unprecedented rate hikes and the stocks are in a bear market.
The poster boys of Wall Street, all from the technology sector, have been facing headwinds in 2022. The recent earnings of these tech firms throw up a mixed outlook for them.
However, ignoring them may not be the best approach after the severe meltdown in their stock prices. Here’s what Viram Shah, Co-founder & CEO, Vested Finance, a FINRA-registered US broker-dealer and an investment platform that enables Indian investors to invest in the US markets feel about the tech sector’s outlook – Two factors work in favour of large-cap and mega-cap stocks. First, consumption in the USA hasn’t slowed down. So the more prominent companies will continue to attract consumers despite a general slowdown across industries. This will benefit large-cap and mega-cap companies in generating steady cash flows.
And, secondly, with the rise in uncertainty due to inflation and war in certain developed countries, investors will rush to buy the large-cap and mega-cap operating globally to diversify their portfolio and minimize the overall risk.
Slowing down of the economy also means a cut in spending across the board. “Largely the companies are mentioning that the price per ad has decreased but the overall usage of the app has increased. For example, for META, as per the company reports, Number of ad impressions has increased +17% year over year, price per ad decreased by -18% year over year. Interestingly, the fastest user growth for WhatsApp is in North America now; global daily app users (DAU) crossed 2 billion. Companies are optimistic about the long-term prospects and most companies have mentioned that there can be short-term volatility in the business,” says Shah.
Sheraz Mian Director of Research, Zacks Research also shares his views on the tech stocks as to what went wrong and future outlook on them. Excerpts:
The earnings bombshells from Amazon and Meta and sub-par releases from Alphabet and Microsoft have forced us all to revisit our long-held assumptions about the sustainability of these technology leaders’ earnings power.
Apple has redeemed itself with its quarterly release, cementing results aside, the questions appear to be mostly about the outlook for Amazon and Meta, as Alphabet and Microsoft’s results weren’t really that bad.
Some of that differentiation was clear from the stock market reaction to the results as well, with Amazon and Meta shares literally being taken to the woodshed following the releases.
The one thing that is becoming clear after results from these ‘Big 5 Tech Players’ is that none of their profitability is Teflon coated and immune from cyclical forces. Apple may be looking invincible today in the afterglow of its quarterly report, but the consumer decision to purchase the company’s pricey phones and other devices will also always remain a discretionary choice and vulnerable to economic forces.
For 2022 as a whole, the group is expected to bring in -13.2% lower earnings on +6.1% higher revenues.
One possible explanation for this group’s growth challenge is the all-around margin pressures, a function of their bulging payrolls, particularly for Amazon, Meta and Alphabet.
Amazon hired a ton of workers during Covid to meet the surging demand as all of us stopped going to stores. The question now is whether they need to let some of those workers go as Covid restrictions are mostly in the rear-view mirror now.
In addition to the group’s margin challenge, there are two key factors that will drive their profitability over the next two years.
The first factor is the unusual impact of Covid on their profitability in the last two years.
The second factor is related to the impact of macroeconomic forces on profitability. Microsoft’s business was affected not only by the slump in PC demand, a function of post-Covid adjustments but also by growth deceleration in the cloud business. We saw similar cloud-centric challenges in the Amazon and Alphabet reports as well.
This cloud deceleration is likely a reflection of companies cutting back on so-called enterprise spending, on top of digital advertising spending. The market was under the impression that cloud spending was effectively immune from economic forces and would not experience any cuts. The numbers from Microsoft, Amazon and Alphabet show otherwise.
This brings us back to evaluating the seemingly Teflon-coated status of Apple’s gadgets and services.
“I am of the opinion that once the Fed’s tighter policy regime produces cracks in the labor market, we will end up discovering that consumers rationally defer replacing their older devices with newer ones. We are not there yet because the labor market is rock solid, but we could very well reach that stage in either of the coming two quarterly reports,” says Sheraz Mian.