Technology

Big Tech's Contrasting Fortunes Create Opportunities, Tests For Investors

Amanda Cheesley Deputy Editor London 3 May 2022

Big Tech's Contrasting Fortunes Create Opportunities, Tests For Investors

As stock weaknesses emerge in the tech sector, illustrated by dramas at Netflix and Twitter, French asset manager Carmignac examines challenges and opportunities for investors.

As Netflix shares plummet, inflation soars, interest rates rise and geopolitical tensions increase, investors may question if they can rely on growth sectors such as technology to deliver returns.

Contrasting fortunes of Big Tech companies – which reported financial results in recent days – and corporate actions such as Elon Musk's dramatic move to buy Twitter – have put technology under a spotlight. The sector was buoyed during the pandemic years when people were confined at home, but higher interest rates to curb inflation and the loosening of Covid-19 controls has created a new environment. One barometer of Big Tech firms – the NYS FANG+ Index, which tracks Facebook, Apple, Microsoft, Alibaba, Amazon, Netflix, Google, Baidu, Nvdidia, and Tesla – has fallen more than 27 per cent since the start of 2022.

“Clearly there has been a lot of stock weakness in the tech market,” David Older, head of equities at Carmignac, said at a press conference which assessed the Q1 earnings season and challenges in the tech sector.

“Investors question whether technology companies have retained adequate pricing power to deal with surging global inflation,” Nicholas Hancock, technology, media and telecommunications analyst at Carmignac said.

“Against this backdrop of inflation concerns, good results are receiving a lukewarm market reaction, while poor earnings are being punished. Growth companies in the technology sector have a lot of earnings expectations that are built into their share prices, so even if earnings are positive, the fear is that the market reaction will not be positive if there are signs of slowing growth,” he added. 

Discussing the focus for investors in the tech sector, Older said: "Companies whose activity was boosted during the Covid crisis may take more than a year to return to normal and pre-coronavirus growth rates.”

Technology stories have been dramatic even by the breathless standards of this sector. Netflix shares tumbled by more than 35 per cent in one day after it lost over 200, 000 subscribers in the first three months of the year, following a surge in subscriptions during Covid. It expects to lose another two million over the next quarter. Paypal also suffered from a similar situation. “There was a real underestimation of the benefits of Covid,” Older explained.

“However, the issues are not the same for each tech sub-sector,” Hancock said. “For consumer internet companies, the key debate is around the strength of the macroeconomic environment and the sustainability of growth for some Covid beneficiaries. Investors are trying to determine the appropriate growth profile for the post-Covid period.” 

“In the semiconductor sector, the situation is delicate due to ongoing supply constraints and fears of an upcoming cyclical correction that could hurt demand,” Hancock added.
 


Opportunities
“Finally, the software industry looks robust in the current challenging environment,” he said. But it is subject to valuation pressure from rising rates.

Software comprises a significant portion of investments in the tech sector by Carmignac, an independent French asset manager, with $44 billion of assets under management as of 2021.

“The industry's move to a cloud-based subscription business model offers resilience and pricing power, ideal attributes in an environment of rising inflation and slowing growth. The trend towards digital transformation is still in its infancy, with only 10 per cent of corporate IT spending having moved to the cloud, a figure that is expected to triple by 2025,” Older added.

There has been a big trend in particular towards security software, Older said, as the risk of cyber attacks grew sharply during Covid and also in Russia. There has also been a flurry of activity in private equity.

Some Big Techs have delivered robust numbers. 

Microsoft Corp saw a strong set of results, unaffected by rising inflation and the war between Ukraine and Russia. Results for the quarter ending 31 March 2022, compared with the same time in the last fiscal year, shows revenue reached $49 billion, increasing by 18 per cent. Due to the better-than-expected results combined with an optimistic outlook, Microsoft shares climbed by as much as 6 per cent on Tuesday last week. 

Apple’s March quarter results saw a 6 per cent rise in net profits to $25 billion too, making it Apple’s third most profitable quarter on record. Earnings rose partly as a result of the group’s services division, which includes iCloud subscriptions. However, the group has nevertheless forecast losses of up to $8 billion in the current quarter due to supply chain shortages and factory shutdowns in China resulting from Covid-related disruptions.

Mark Crouch, analyst at social investing network eToro said: “Typically, the firm is one of the most reliable stocks in the world and has delivered year in, year out, in turn making it one of the biggest companies in the world. There is good news in results, namely its growing service division and rising revenues.”

“However, its results have shown that it too is not immune from wider global economic problems – namely that of supply chain disruption. Questions will be asked over its reliance on Chinese supply chains and why it hasn’t moved to diversify some of its processes to other regions in the past two years, in the knowledge the Chinese Government would always be taking a hard line on Covid waves.

“So far the stock has fallen pre-market, but hasn’t reacted in quite as an extreme way as other Big Tech names such as Netflix or Meta have when posting worse-than-expected results,” Crouch said.

“But investors will only show faith for so long. So while it is okay that it is forecasting billions in setbacks because of bottlenecks, it has to correct this in short order or future reports might start sending a bigger signal of fear through its shareholder ranks,” he warned.

Tesla shares have also tumbled by more than 12 per cent after investors were worried that its CEO Elon Musk might have to sell shares in the electric car maker after he purchased Twitter for $44 billion.  

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