Taking the Temperature on Tech Stocks

In recent years, tech has reigned supreme in the markets. But with earnings season behind us, are the good days over?

What is clear is that macroeconomic uncertainty is still wrecking havoc with rising interest rates, higher fuel costs, the war in the Ukraine and stubborn supply-chain issues, affecting every tech business. At the same time it has also become apparent that some businesses’ value propositions are emerging stronger than others. Here are a few takeaways on the outlook for tech stocks.

Layoffs don’t necessarily make stocks jump

Reductions in force are hard. While conventional wisdom once held that shareholders “liked layoffs as a signal that the company is serious about controlling costs,” according to Harvard Business Review, many times “investors interpret downsizing as a symptom of mismanagement or eroding demand.” We’re seeing a mixed reaction to such moves from tech giants today. While some technology companies have seen their stocks jump after announcing mass layoffs this earnings season, others haven’t.

Coinbase gained nearly 13% immediately after its layoff announcement in early January, while Microsoft’s announcement of a 5% cut to its workforce was met with complacency with the stock ending only slightly down on the day. The key question seems to be whether investors perceive the cuts leading to lasting gains. For example Zuckerberg announced in conjunction with Meta’s announcement of 11,000 layoffs that 2023 will be the “year of efficiency.” Its stock has since risen by close to 80%.

AI frenzy will create winners and losers

In the past weeks a flurry of AI announcements have been made by tech companies. As investors have given their initial verdicts, it seems that it’s easier to lose than win when it comes to AI initiatives. Microsoft at first seemed like a winner with its ChatGPT announcement and OpenAI partnership, but faced backlash as it became clear they had over-promised and under-delivered. Similarly, Alphabet has struggled with converting its AI initiatives into something driving up share value. The stock posted its worst ever two-day market cap loss after its event to promote Google’s new chatbot. Nvidia, on the other hand, seems to have fared better. It unveiled a new business model to sell its AI services directly to companies, on Feb 22. The announcement got a nod of approval from investors, something that may translate into it being a long-term AI winner.

Enterprise is going strong

Cisco and HP are two tech companies that have shown that enterprise is not sweating current macroeconomic conditions. During its Q2 earnings on February 15, Cisco announced it’s expecting strong growth as supply-chain obstructions ease. In addition it has a healthy backlog of orders from the Covid-19 pandemic. It’s also set to benefit from spending on cloud infrastructure. HP Enterprise followed the trend and posted better-than-expected financial results for its fiscal first quarter ended Jan. 31 and raised its full-year guidance. It is also tapping into increased spending on cloud and plans to offer a cloud-based supercomputing service for training artificial intelligence large learning models.For the quarter, Hewlett-Packard Enterprise reported revenue of $7.8 billion, up 12% from a year ago, and above the high end of the company’s guidance range of $7.2 billion to $7.6 billion.

Rising interest rates, higher fuel costs, the war in the Ukraine, stubborn supply-chain issues, and the U.S. dollar’s surge are still affecting every tech business, but there seems to be light on the horizon. In 2022, the Nasdaq ended the year down 32.96%. 2023 has seen a sharp uptrend with the Nasdaq rising 8.8% and reaching a market cap of $18.219 trillion. Much points to the tech industry recovering in the upcoming year as the challenging macro-economic conditions can’t continue forever. There are plenty of reasons for investors with a long term perspective to stay bullish on tech. The trick will be to focus on the right companies and find the right technologies to bet on.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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