Elon Musk’s offer to buy Twitter had made this social network the exception to the sharp falls suffered by technology stocks on the Stock Market in 2022. However, not even the bird’s platform has been spared from the scavenger on the parquet after meeting on Friday that Musk left the operation up in the air. After years of unstoppable rises in the US Nasdaq technology index, sales and distrust have settled among investors, who are turning their backs on growth companies (growth) and taking refuge in the so-called value actions (value) such as food and beverage companies, capable of withstanding the bad times that some macroeconomic variables already indicate. Money is also jumping into energy, attracted by high fossil fuel prices and a green revolution in full transition. A change of course, accelerated by the turn of the rudder in the central banks, which analysts at the US bank Goldman Sachs rightly baptized as the “revenge of the traditional economy”.
The Nasdaq index rose 26.6% in 2021 and in the year it has already lost 28% of its value. Analyst David Galán, director of the General Stock Exchange, believes it is necessary to make a distinction between technology stocks: “On one side are those large companies, such as the so-called FAANG (Facebook, Amazon, Apple, Netflix or Alphabet), with abundant and continuous profits, and on the other, the small and medium-sized ones, many of them still without benefits and where speculation has been fueled more in recent years”. Rises of 100% in a year were common in these lesser-known stocks, fueled by money from small investors operating from their homes confined by covid-19. The boom of the last two years of cryptocurrencies and growth stocks responds to this scheme along with the fever of the so-called Spac, listed shells in which they invested without knowing which companies they would eventually acquire. An investment blindfolded.
Echoes of the year 2000
An example of this authentic bubble centered on small values that is very reminiscent of the crisis of the dot com of the year 2000 could be Rivian, the manufacturer of electric trucks and pick-ups, whose price has fallen by 78% of its value in just over four months. But there are numerous cases. As indicated by the management company Carmignac, the celebration of these values has come to an end, for the time being. “We remain cautious about unprofitable technology companies, since in an environment of higher rates, investors are not willing to finance growth at the expense of profitability,” they say in the French firm.
Losses have also been abundant in the big business emporiums, although here it is different. Meta Platforms (Facebook parent) has lost 43.5% in the year, Paypal (-62%), Amazon (-37%), and Netflix stands out, which has left 71% of its capitalization so far of 2022. The most moderate decreases correspond to Apple (-21.6%), Microsoft (-23%) and Alphabet (-22.1%).
Olivier de Berranger, investment director at La Financière de l’Echiquier, reviews the misbehavior of these giants in a recent report. “The closure of activities in Russia has hurt the accounts of Alphabet, Meta Platforms and Apple for the year as a whole, as well as lower advertising revenues in practically all markets,” says the French manager. “Apple posted higher-than-expected revenue but revised its second-quarter targets due to lower demand in China due to its covid-zero plan. Amazon was weighed down by rising wages and rising transportation costs, leading to a loss in the first quarter. And Microsoft is the exception, as it continues to benefit from the digitization drive with its Azure cloud platform, revenue growth at LinkedIn and its Surface computing division,” he adds.
He knows in depth all the sides of the coin.
Amazon’s losses of 3,844 million dollars in the last quarter have been a blow to the sector, since investors are now beginning to take the valuation of these companies seriously, when before it mattered little: they always grew. Thus, in addition to the problems of a situation of economic slowdown and once the advantages that the confinement of covid-19 brought to many of these businesses, the rise in interest rates is the other big leg of their loss of attractiveness. . As David Galán explains, these companies are valued taking into account the expected annual growth rate of their results for several years ahead and the free discount rate marked by the evolution of interest rates is applied in the denominator. The rise in the price of money experienced by the Western world, and especially the United States, causes a reduction in the valuation of these companies, which explains the falls on the stock market.
From Goldman Sachs they point out that, if long-term interest rates remain at current levels (3% for the 10-year bond) or rise more, “it is unlikely that purchase recommendations will return to the technology sector: there are more risk that rate normalization will push the valuation down further, especially if earnings growth is not enough to offset these higher rates.
Price cuts in these shares have lifted valuations somewhat, bringing them closer to industrials. The times that the price contains the benefit (PER) of the big technology companies is currently 27 times, while in the large comparable industry it is 17 times. It may be excessive, although we are talking about companies with great capacity to grow. However, only five years ago the ratio was 49 times for technology companies compared to 19 times for industrial companies. “We have long argued that many of these companies were already perfectly priced, and any challenge to that growth assumption would highlight the lack of anchoring in their prices. This seems to be the case now”, concludes Daniel White, manager of M&G.
Buy or run?
The shift in the world of money from growth stocks, with technology in the lead, to safe and reliable income stocks (consumer, energy companies) has begun and it will be difficult to see a radical turnaround in the coming months . In addition, higher interest rates imply lower tech valuations and more rate hikes are expected for now. But the punishment in prices has been significant and experts are beginning to show interest in some companies. For example, David Galán, from Bolsa General, bets on cybersecurity and software companies at current levels. “In cybersecurity we expect strong growth and subscription payment models such as Microsoft represent a constant and secure flow of money. Also by companies like Alphabet that operate in a near-monopoly regime,” he explains. At Goldman Sachs, they say they are overweight in technology and bet on automation software and companies dedicated to technology-enabled health care. That yes, believe that it is the moment of an active management and to select a lot of the values. For the fund manager Fidelity, companies such as Ericsson, Samsung, Alphabet, Intel, Infineon, Activision, Netflix, IBM and Analog Devices are part of its technological portfolio due to the great growth that 5G, artificial intelligence, electric vehicles, etc. will bring. video games or robotics.
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