Technology
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.