Last year, the tech sector performed very badly:
- Tech stocks fell more than 30% in 2022, more than the overall market drop of 20%.
- The decline came due to higher interest rates, high inflation and uncertain economic conditions.
In this article I’ll explain why tech suffered so much, what their new reports say and which of these companies are cheap to buy in the dip now.
2022 was the first year the NASDAQ saw four quarters of dropping values. It was the third-worst year for tech after 2008 and the bursting of the dot-com bubble in 2000. Major players in the world of tech saw huge losses. Meta lost two-thirds of its value, and Tesla saw similar drops. Amazon also lost half its value.
Why did tech companies fall in 2022?
1) Tech stocks fell because the Federal Reserve started raising interest rates. Tech companies and startups relied on the cheap money that interest rates of almost 0% provided.
2) As the rates rose, investors sought to generate cash immediately rather than putting money into businesses hoping for future returns.
3) Inflation also contributed to the fall, as did the fact that advertising budgets were cut in response to recession fears, leading to lower ad revenues for many tech companies.
4) Additionally, the strengthening of the U.S. dollar significantly impacted many major tech firms that rely on overseas business.
How long will the slump go on?
The impact of higher interest rates will likely continue for quite some time. The Fed expects to continue raising rates through the end of 2023 and hold them steady until at least 2024.
This indicates that tech businesses have at least two years of higher rates before they can expect some relief from the central bank.
Should you buy tech companies now?
Investors who can handle volatility in their portfolio might consider investing in well-established tech companies during the downturn, hoping they’ll recover as the economy improves. Let's look at 4 major companies that have published quarterly and annual reports recently.
Note: this is not investment advice.
According to their recent report, net sales increased 9% in 2022, compared with 2021.
However, operating income decreased 50% to $12.2 billion in 2022, compared with $24.9 billion in 2021. North America and International shipments faced losses, while only AWS showed income.
Amazon also increased its investment by $10 billion last year to support its cloud computing business, which is traditionally its biggest profit driver. AWS segment sales increased 20% year-over-year, but the cloud business of their competitor Microsoft grew 22% over a similar time period, but Alphabet's cloud business increased 32% in the fourth quarter.
It's important to remember that Amazon is a leader in e-commerce and AWS already dominates the cloud industry and accounts for a 34% of the total market, whereas Microsoft has 21% and Alphabet has only 11%.
These markets are forecast to grow in the double-digit percentages throughout this decade. Although Amazon doesn not seem like a fast gainer in the current economic conditions as customers are cutting spendings, but so is Amazon. Transportation costs are coming down, which will contribute to better operating margins in the coming quarters.
Third-party sellers accounted for 59% of total sales, and that number has been climbing. That’s a low-cost source of revenue for Amazon.
Advertising sales increased 23% over the last year, and that's a growing area with a lot of potential for the company. Today, Amazon shares are trading at 1.95 times sales -- near their lowest point by that measure since 2016. This represents a huge opportunity to get in.
Apple reported that revenue fell 5 percent to $117.15 billion during the three months that ended in December, the company’s first quarterly sales decline since 2016. Profits decreased 13 percent to $30 billion.
However, Apple’s CFO says the demand for new gadgets is expected to dampen in the coming year, an increasing proportion of Apple’s revenues come from its services and subscriptions. In the December quarter, Apple's services revenue rose 6% year over year to $20.77 billion. Services include the App Store, iCloud, Apple TV+ and other offerings.
It’s important to note that amidst difficult economic conditions, Apple have beaten expectations 3 out 4 times in their quarterly earnings announcements last year.
And the next growth driver in 2023 might be their headset for virtual reality and augmented reality, that’s been leaked in the news.
Alphabet, Google’s parent company, reported revenue of $283 billion for the full year 2022, up 10%.
However, Alphabet’s revenue came in below expectations as its advertising revenue fell for only the second time in its history, partly because of the strength of the US dollar and comparisons with soaring growth a year before.
YouTube advertising revenue fell short of analyst expectations to $7.96 billion — 8% down from the year before.
Their financial statement shows that everything except for Google Cloud showed worse performance in comparison to 2021.
There's no doubt that Alphabet, like any other business, is dealing with the weaker macro environment. Advertising costs are one of the first things businesses cut in hard times. But according to data provided by Statista, Alphabet commands a 28% share of the global digital advertising market that is expected to eclipse $1 trillion by 2027.
The company is also focused on AI. CEO Sundar Pichai said “Very soon, people will be able to interact directly with our newest, most powerful language models as a companion to Search, in experimental and innovative ways.”
Now is a good opportunity to buy Alphabet shares, because they are currently trading at a price-to-earnings (P/E) ratio of 17. This is substantially cheaper than the trailing-10-year P/E of 29. One last thing - Warren Buffet has recently bought 17,100 shares of Alphabet.
Meta, formerly known as Facebook, has reported negative results in Q4 and feels like the weakest. In brackets means minus, or decline.
However, shares rose 20% that day because investors expected even worse results. So Mark has pleasantly surprised everyone.
- EPS $1.76, missing the estimate 2.22
- Revenue $32.17 billion, -4.5% y/y, beating the estimate $31.65 billion
- Advertising rev. $31.25 billion, -4.2% y/y, beating the estimate $30.86 billion
- Family of Apps revenue $31.44 billion, -4.1% y/y, beating the estimate $30.81 billion
- Reality Labs revenue $727 million, -17% y/y, beating the estimate $652.4 million
The company's user metrics were also quite solid:
- Daily active users 2.00 billion, beating the estimate 1.98 billion; and up more than 70 million from a year prior.
While the earnings were satisfactory, the main reason for the 20% growth in a day was the company's announcement of a whopping $40 billion stock buyback.
As for its prospects, Zuckerberg said in Meta's Q4 call that one of his goals for the company is "to become a leader in generative AI in addition to our leading work in recommendation AI."
Although all eyes are on Google and Microsoft in their AI rivalry, Meta has long been a pioneer of AI. For example, Facebook was a pioneer in image recognition. Remember, how you got notifications Is that you on the photo?
In 2022, the company launched the AI Research SuperCluster, one of the fastest AI supercomputers in the world. Meta's scientists plan to eventually use the system to train AI models "with trillions of parameters." By comparison, Open AI's ChatGPT was trained on 175 billion parameters.
Huge sets of training data are critical for improving AI systems. That could give Meta an advantage. The company's messenger applications combined are used by nearly 3 billion people on average every day. Few rivals can match the conversational data access that Meta has.
Short-term, the company is trying to restructure costs and become more efficient, there is no fast way to increase profits now and thus see dramatic stock growth. However, Mark introduced paid verification.
Long-term, the prospects are vague too. Instagram sees rising competition from YT shorts, WhatsApp is competing with Telegram, and AI technologies with Microsoft and Google, etc. The only unique product is Metaverse, but it’s far from being complete.
So Meta looks like the riskiest stock in this bunch.
One thing to consider is that tech isn’t a single industry. It includes ecommerce, cybersecurity, social media and dozens of other industries.
Some analysts believe that specific sectors of the tech industry will outperform the tech market as a whole. For example, as more companies realize cybersecurity is essential for keeping their business safe, the cybersecurity industry could outperform other sectors. As it has outperformed the market in the past 5 years.
To conclude, it may be a good time to buy big tech companies because their decline has more to do with bad macroeconomics rather than them losing market shares or doing their jobs badly. They all continue to generate cash, and can survive through protracted recession. We might even see consolidation on the market, because richer and bigger players will buy out drained smaller startups.
Buying smaller, unprofitable tech companies is more risky at the moment. If the Fed doesn’t change direction, without cheap credit, many tech companies will struggle to survive. The trick is that we don’t know how long it will take. So it’s better to focus on stronger companies and buy them while they are cheap.
Another approach is buying more specific sectors, that are in demand despite market conditions, such as cybersecurity, AI and Cloud computing.
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