Tech, once the overlord of the stock market, has had a rough 2022. The information technology sector of the S&P 500 is down 17.4%, versus negative 13.3% for the index. The …
Tech, once the overlord of the stock market, has had a rough 2022. The information technology sector of the S&P 500 is down 17.4%, versus negative 13.3% for the index. The only two worse-off sectors are consumer discretionary (losing 20.4%) and communications (negative 28%).
But there was a reason that tech, and the segment’s largest companies in particular, reigned over the stock market for so long. They are tomorrow’s companies, the embodiments of what will lead the economy far into the future.
Will some stumble and maybe even fall? Very possibly. Meta Platforms, parent of Facebook, shows every sign of heading into deep trouble: a frantic search for a new corporate identity, advancing competitors such as TikTok, and Meta’s suffering stock, down 53% this year, the worst of the major tech titans.
Recent earnings reports demonstrate that many of the 2017-2021 champs still have the juice. True, interest rate increases are not the friend of growth stocks, as they lower the outlook for future cash flows. What’s remarkable for this group of tech giants is that, despite some current problems, they have shown in the trouble-prone second quarter that they retain the resilience that should set them up for continued preeminence.
Amazon, whose stock is down 19% this year, is a case in point. As the economy weakens and the pandemic order-from-home trend ebbs, the company’s e-commerce sales slowed. Its earnings registered a second quarter loss, but mainly from a huge write down of its stake in struggling electric vehicle maker Rivian. Amazon still is the dominant force in online commerce, which should flourish anew once we get through the current economic malaise. Meanwhile, Amazon’s ad revenue is doing well, as it poaches from others.
But more important are the sterling results from its Amazon Web Services operation which makes up 15% of revenue and 100% of profit. AWS is the No. 1 cloud provider, an area that is expanding rapidly. In fact, the cloud services of other tech giants, Microsoft and Google-parent Alphabet, demonstrates that the three of them are very well positioned for the future.
Microsoft, off 10% year to date, had a small miss from analysts’ projections for its quarterly results. But the software kingpin predicted on its earnings call that operating income and revenue should show double-digit growth in the fiscal year ending June 2023.
Apple, which lacks a cloud platform, did beat estimates. Its supply constraints didn’t prove to be as vexing as initially believed, and it has managed to convert a decent number of Android users. The iPhone, which makes up half of Apple’s revenue, has a new version of the device coming out in the fall.
Apple admits it faces obstacles with factory shutdowns in China, where iPads and Macs are produced. Despite all, the company, whose stock has dipped 8% in 2022, expects its revenue to register good growth in the September-ending quarter.
Similarly, Alphabet (down 19%) seems to have the tools to power through any economic downturn. While its earnings had a miss, the company appears to be less affected by Apple’s move to curb ad tracking, according to Evercorse ISI analyst Mark Mahaney, in a note.
True, not all of the previous tech leaders appear marked for continued greatness. You have to wonder of Meta will make a profitable transition into the still-budding metasphere, as its core Facebook business faces less user interest.
The rest, however, are the key players as the economic and market future unfolds.