Disenchantment with the US tech sector
Stocks of US technology companies have been under pressure since the start of the year. This is due to the policy turnaround of the central banks and growing pressure on margins. But some tech segments continue to offer opportunities.
The technology-heavy Nasdaq index has been suffering heavy losses in recent weeks. Since the start of the year, it has shed almost 25 per cent. At the end of April, profit warnings from Netflix, Apple and Amazon shocked the market. Netflix shares plunged by 26 per cent within one day and have lost more than 68 per cent since the start of 2022. The streaming service provider has recorded a decline in subscriptions for the first time in ten years and anticipates a further fall in subscriber numbers. Amazon took the markets by surprise when it reported a loss for the first quarter. And the company expects stronger headwinds in future due to rising costs for transport and logistics as well as excess capacity. Revenue growth fell to just 7 per cent, compared with 44 per cent in the prior-year period. Demand from customers has so far remained robust, but high inflation is likely to have an adverse impact going forward. Apple, on the other hand, is feeling the supply squeeze caused by coronavirus-related shutdowns in China. This could cost the company up to US$ 8 billion in revenue in the current quarter. In addition, Apple customers have to think more carefully about their spending in the current environment. The company’s weak outlook overshadowed the fact that its first-quarter results were relatively positive thanks to pent-up demand from 2021.
Tuesday (24 May 2022) brought further bad tidings. The share price of Snap collapsed by 43 per cent. Since the start of the year, the stock has lost more than two-thirds of its value. Snap, the parent company of photo app Snapchat, had to retract the quarterly forecast it had published just one month ago, stating that the economic environment had deteriorated more severely and more rapidly than anticipated. This news had a knock-on effect on other social media companies that rely on online advertising as a primary source of revenue, amid concerns that future marketing budgets could be slashed in a weakening economic environment. Pinterest shares plummeted by almost 24 per cent on 24 May 2022, while Twitter and Google’s parent company Alphabet were down by just over 6 per cent and 5 per cent respectively. The share price of Facebook’s parent company Meta Platforms fell by 8 per cent. Since the start of the year, Meta has lost around 43 per cent and Alphabet around 26 per cent.
Tech stocks remain under selling pressure
Security selection is key in the current market environment
Several reasons for price crash of tech stocks
The current weakness of US tech stocks is attributable to several factors. The high inflation rates seen in recent months, which have been further fuelled by the war in Ukraine, prompted a monetary policy turnaround by the US Federal Reserve (Fed). Higher interest rates are having a particularly strong impact on growth stocks from the tech sector, because a large proportion of the anticipated profits and cash flows that these companies offer lie a long way off in the future and are now being discounted at higher rates, which brings down the valuation. In addition, rising bond yields make volatile and relatively highly valued tech stocks significantly less appealing for investors.
Since the end of the financial crisis, i.e. from around 2009, the stock markets had been dominated by fast-growing technology companies. In some cases, the rapid share price growth led to very high valuation premiums, which are likely to have lost their justification now that the tide has turned in the capital markets. This is true, in particular, for non-profitable tech companies. Businesses that were not generating profits yet were reporting an EV/revenue multiple of 60. Dark clouds are also looming on the inflation front. High inflation rates are clearly squeezing consumers’ disposable income. In consumer-linked sectors such as gaming, smartphones and consumer electronics, the adverse impact is already becoming noticeable. Moreover, these industries benefited strongly during the pandemic. When lockdown restrictions were lifted, demand thus fell off a cliff. Consumers are now fairly well equipped in these areas and prefer to spend their money on services like travel or concerts, which they had to give up for several years.
It is thus hardly surprising that big winners of the pandemic such as Netflix, PayPal, Amazon and Shopify have lately reported disappointing growth figures. Highly cyclical sectors like the semiconductor industry have also suffered. After many very successful years, market participants believe that the current semiconductor cycle has now reached its peak. Against the backdrop of the anticipated downturn in demand in key end markets such as smartphones and computers, inventory levels are already starting to rise in certain areas. Persistent supply shortages in connection with the pandemic are another issue. Chinese suppliers, in particular, are struggling under their government’s zero-COVID policy. By contrast, the war in Ukraine only has minor implications for the industry, because Russia accounts for only a small single-digit percentage share of the revenue of most companies in this sector.
Sustainable business models are gaining in importance in the tech sector
Following the steep price falls of recent months, valuations in the tech sector have come down substantially. And although the tech stock boom might have largely come to an end for now and conditions are getting tougher, certain segments still offer opportunities. Companies with a strong market position that stand to benefit from long-term structural growth trends remain attractive. Shares in software companies, for example, offer a degree of stability thanks to the high proportion of recurring revenue of these business models. And segments such as cyber security and data centres also continue to trend upwards.
As at 27 May 2022.