Weekly Brief: Tech Stocks Aren’t Nearly As Popular As They Used To Be

Weekly Brief: Tech Stocks Aren’t Nearly As Popular As They Used To Be

almost 2 years ago3 mins

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US tech stocks used to be the coolest stocks in any room, and this year’s proved just how difficult it is to get back into the in-crowd.

🕰 Recap

  • Netflix kicked off Big Tech earnings by announcing much worse results than expected
  • Alphabet and Microsoft reported their quarterly results early last week
  • They were followed by Facebook-parent Meta’s mixed earnings on Wednesday
  • And then by Amazon and Apple’s divergent quarterly updates on Thursday

✍️ Connecting The Dots

Big Tech isn’t as monolithic as it used to be: the giants are split between a variety of industries: information technology (Apple and Microsoft), communication services (Meta, Netflix, and Alphabet), and consumer discretionary (Amazon). So to understand investors’ expectations for the group, you need to look across all three sectors.

Heading into this quarter’s earnings season, information technology companies were expected to have grown earnings 8% from the same time last year, communication services to have shrunk earnings by 3%, and consumer discretionary to have shrunk by 12%. That was partly reflected in stocks’ performance through the first quarter, with Apple and Microsoft outperforming Meta and Netflix in particular.

Investors have largely been vindicated in that view in the last couple of weeks of earnings: Netflix’s subscriber numbers rewound for the first time in a decade, and investors sent its stock tumbling. Amazon’s update disappointed too, with the company’s revenue forecast in particular falling short of expectations. It’s not hard to see why: inflation’s at record levels, so nice-to-haves like video streaming subscriptions and online purchases are taking a back seat. That had a knock-on effect on Amazon, Meta and Alphabet’s advertising businesses too, since companies aren’t spending as much to attract less liquid customers right now.

Still, customers were all too happy to spend big with Apple, helping the iPhone maker turn in higher-than-expected earnings and giving ts stock an initial boost. Microsoft too: between its near-essential productivity subscription business and fast-growing cloud computing segment, the company blew past investor expectations.

🥡 Takeaways

1. The change of rates helps explain the rate of change.

Investors see almost all of the value of tech stocks in their future earnings, which they discount back to today to calculate what their shares should be worth. That “discount rate” is heavily influenced by central bank interest rates: the higher they are, the higher the discount rate is – and the lower a company’s valuation. That’s exactly what’s been happening in 2022: interest rates are on the rise, which has led tech companies’ valuations to plummet even if they turned in better-than-expected results.

2. A bet on Big Tech is a bet on megatrends.

World-shifting trends tend to make for exciting investment opportunities and Big Tech is plugged into lots of them. Take cloud computing: Amazon, Alphabet, and Amazon are the biggest cloud computing companies out there, and they’re still growing fast. After all, just 5% to 15% of all corporate tech spending goes to the cloud right now, and the industry’s only becoming more important in a post-Covid world. And don’t forget the metaverse: Meta might only have 300,000 users on its metaverse platform right now, but it’s hoping it’ll convince more people to leave the real world behind when it opens its first-ever retail store in California next month.

🎯 Also On Our Radar

Elon Musk sold $4 billion worth of Tesla shares last week, in a not-entirely-unexpected move: analysts have suspected he’d sell some of his holdings to fund the purchase of Twitter, and investors have been selling off their Tesla shares in hopes of avoiding the drop in price that a big sell-off could cause. Musk’s since promised – on Twitter, of course – that he wouldn’t sell any more. And since Tesla’s stock has dropped 11% since the takeover offer was announced, that might be the signal investors need to buy back in on the cheap.

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