The rebound in the Nasdaq Composite Index after seven weeks of losses restored confidence in technology stocks. After all, more than half of Nasdaq’s member companies are down 50% or more from late-2021 highs until recently.
Pundits and analysts have pointed out that the Federal Reserve’s past ultra-dovish policy, the global pandemic, disrupted supply chains and rampant speculation have inflated company valuations and burst asset bubbles.
Perhaps the pinnacle of exuberance during this period was the runaway valuations for “earningless” tech companies that removed the SPAC and went public — in many cases, features on publicly traded companies and poor-to-modestly performing tech names became no profits, which are traded with exorbitant turnover multiples.
Valuations for some technology stocks have fallen more than 75% from their pandemic-related highs. Companies like Zoom ZM,
main field PTON,
and Roku ROKU,
to name a few.
We’ve heard some analysts go so far as to compare the current market to the “point bomb” crash of 2000. It’s a smart comparison for headlines, but despite the massive declines in both periods, it lacks any basis.
No, it’s not the point bomb crash again
Before we delve further into the prospects for the technology and the critical role it will play in the subsequent recovery, it’s worth taking a moment to contrast the “dot bomb” crash with today’s technology environment.
While a handful of low-quality tech companies have gone public in recent years, I believe the only significant common ground is the trillions of dollars in wealth wiped out in recent months and during the 2000 crash.
In the dot-bomb era, investors threw money at companies with no significant product or track record of revenue or profit trajectory. Many were just “dot com” versions of physical retailers selling toys, pet supplies, or internet search businesses. Of the 457 IPOs in 1999, 117 had stock prices up more than 100% on the first day of trading. By the time the Nasdaq finally bottomed in October 2000, the Nasdaq had lost 78% of its value and a large number of companies would fail in the months that followed.
In this downturn, many of the named companies with significant price declines, like Zoom and Twilio, are still showing significant revenue growth and profits. There’s an argument that the pandemic has accelerated growth and artificially inflated stock prices, but the underlying companies are real companies with customers, growth, and in many cases profitability — a stark contrast to the aftermath of the dot bomb -Era.
We need to “engineer” our way out.
Over the past few weeks, I’ve had the opportunity to sit down with the CEOs of many technology companies, including Marvell MRVL,
Hewlett Packard Enterprise HPE,
and Five9 FIVN,
I made it a point to ask each of them about the current macro conditions – inflation, war, interest rates, tight labor markets, supply chains, etc. Of course, all CEOs pay close attention to the macro environment, but one key theme that has emerged from conversations:
Technology will provide the key ingredients for solving many challenges.
While Cathie Wood wasn’t very popular with investors after Ark Innovation Fund ARKK,
Down more than 70% from their all-time highs, their thesis on the longer-term impact of technology as an answer to many of the world’s biggest challenges in healthcare, finance, cybersecurity, and climate has earned its merit.
In other words, automation, cloud, software as a service (SaaS), artificial intelligence (AI), communications and 5G will streamline businesses, reduce the risk of fraud and cybercrime, automate simple tasks, improve workflows, and enable innovation through higher throughput and Lower latency connectivity. The supply chain requires manufacturing diversification and the use of big data and AI to optimize material sourcing, product assembly, shipping data and more.
The companies enabling these technologies will be of paramount importance going forward, and the stocks associated with them should take root sooner or later as that becomes more evident.
Tech gains were much better than expected
Last month’s tech earnings were a lot better than most expected. While there were some surprises on the downside, like Amazon’s AMZN,
Surprisingly, most technology companies did reasonably well. Even the forecast largely held up despite the rumblings of economic collapse.
At the start of the earnings wave, enterprise-heavy technology companies like IBM and Microsoft MSFT,
had another outstanding quarter. Apple AAPL,
also came well above expectations. Almost all chipmakers exceeded expectations, including companies like Qualcomm QCOM,
and AMD AMD,
to have record results. Last week we saw Nvidia NVDA,
show record results despite crypto and gaming concerns. Marvell had an absolute blowout result and Dell Technologies delivered a big upside surprise, spurred by a solid performance in its data center business.
Tech companies that will be successful
When you look at recent results, it’s hard not to see a trend line between enterprise technology companies and notable performance numbers.
Despite being a juggernaut, Apple consistently exceeds expectations despite its ongoing concerns about supply chain issues.
This quarter delivered solid results for enterprise software and technology companies, which could meet the needs of companies looking to invest in IT infrastructure, software and technology to make their businesses more efficient, productive and customer-centric.
Some companies to watch.
Microsoft: Its highly diversified portfolio, cloud business, and portfolio of business applications make it a staple for almost any organization.
: Last week at its investor day, the company provided an upbeat outlook and is targeting $16 billion in recurring revenue by 2026 as companies invest in workflow and process automation.
IBM: If the deal between VMware and Broadcom excites investors, a company like IBM, which owns Red Hat, should have appeal. IBM has also held up exceptionally well during the tech downturn.
Qualcomm: Almost every 5G device on the planet is connected to Qualcomm in some way. The company has a bright future ahead with its increasing diversification in the automotive and Internet of Things (IoT) sectors and its handset license agreements with every OEM/ODM worldwide.
NVIDIA: AI is a board-level priority in almost every company. Nvidia’s data center business grew 83% last quarter and has become its most important business segment, surpassing its gaming revenue.
Daniel Newman is the lead analyst atfuture researchthat offers or has provided research, analysis, advice, or advice to Nvidia, Intel, Qualcomm, and dozens of other companies. Neither he nor his company hold shares in the companies mentioned. Follow him on Twitter@danielnewmanUV.
https://www.marketwatch.com/story/5-large-companies-that-will-emerge-from-the-tech-wreck-as-even-more-fearsome-11654026920?rss=1&siteid=rss Opinion: 5 big companies that will emerge from the tech wreck even more scary