Investment Idea

US technology: comeback in installments

Vontobel Markets
15/05/2023 | 5 min read
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After a significant setback last year, tech stocks have recently started an impressive recovery. However, prices seem to be running somewhat ahead of current developments. Accordingly, a risk buffer can be considered for an investment in the promising long-term sector

For many years, technology stocks could be relied on almost blindly for wealth creation. After the end of the financial crisis in 2009, the Nasdaq 100 gained around 14 times by the beginning of 2022, with almost no setbacks worth mentioning. But then investors had to painfully learn that the stock market is not a one-way street. Last year, the renowned tech index lost more than a third of its value at its peak. The main reasons for this were the turnaround in interest rates, the economic outlook and a slowdown in growth.

The tide is turning

Fueled by hopes of a pause in the cycle of interest rate hikes, or even an end to the hikes, the tech sector has recently been celebrating a comeback. Since the turn of the year, the Nasdaq 100 has surged, outperforming the Dow Jones and S&P 500. But it is not only the interest rate hopes that are currently giving wings to the majority of tech stocks; a kind of gold-rush mood has also broken out in the field of artificial intelligence (AI). The currently much-discussed program "Chat GPT" impressively demonstrates what AI is now capable of. According to experts, the boom triggered by the chatbot could provide additional growth impetus and, among other things, boost semiconductor sales by around ten billion US dollars in the next twelve months. One thing is clear: such a boom attracts investor interest.

Value development Nasdaq- 100 over 5 years

Source: Bloomberg & Vontobel, Observation period 26.03.2018- 23.03.2023 Note: Previous value developments and simulations are not reliable indicators of future value developments.

Between flawed balance sheets...

When it comes to the actual growth of so-called growth companies, the current situation - at least at first glance - is less exhilarating. For example, the "AAA" tech giants Alphabet, Amazon and Apple have recently experienced disappointments. At Google parent Alphabet, a slump in the online advertising market resulted in weaker-than-expected business in the final quarter of 2022. At Apple, it was primarily Corona-related production downtime in China that ensured that the cult group's reported profit was below forecasts for the first time since 2016.

The world's largest online retailer Amazon managed to generate more revenue in the Christmas quarter than market participants had in mind, despite inflation and recession worries, but its outlook for the opening quarter of 2023 fell short of expectations. The company is projecting revenue of $121 billion to $126 billion and operating profit between zero and four billion. This compares with revenues of $116 billion and earnings of $3.7 billion in the year-earlier period.

...and some individual positive surprises

However, there is also positive news from the ranks of the big techs, above all from Meta platforms. Although the group formerly known as Facebook, like Alphabet, also had to accept a decline in sales and profits in the fourth quarter of 2022 due to a slowdown in the advertising market, the market was expecting higher discounts. The stock jumped about a fifth after the release, the most since nine years ago. A positive factor was that founder and CEO Mark Zuckerberg is increasingly focusing on profitability. Among other things, further cost reductions are to contribute to this. According to the CEO, 2023 will be a "year of efficiency".

But even as Meta tightens its belt in the future, the group continues to push its digital worlds, known as "Metaverse" in the jargon. In addition, Zuckerberg mentioned the Chat GPT AI program, calling the software an "exciting area." At the end of February, Meta unveiled "LLaMA," its own AI project. For now, the application is intended to support researchers in their work to better understand and adapt how the model works by making the source code more or less publicly available.

Race for a megatrend

Speaking of AI, Alphabet (Google's parent company) also wants to have its say here. Google has been working on a machine learning system for its search function for quite some time and is already planning to use intelligent language systems "very soon" for web searches, among other things. The neural language model, which has been developed over several years and trained on texts and dialogs, runs under the name "Bard" and, according to Google CEO Sundar Pichai, can combine the "full range of the world's knowledge with the power, intelligence and creativity of our language models."

Meanwhile, Microsoft is also riding the AI wave. The corporation announced in January that it would invest billions more in chat GPT creator OpenAI. In addition, the software giant wants to integrate Chat GPT into its services such as the Office package, the meeting software Teams and the search engine Bing, and with the latter offer a serious alternative to Google's search algorithms. As early as June, the chatbot will be included in Teams' premium service and will be able to generate automatic notes, recommend tasks and help create templates. The effort signals Microsoft's ambitions to reclaim leadership in consumer technology markets.

However, the company will also have to come up with something to maintain its previous growth. Like the aforementioned AAA stock market giants, the company, founded by Bill Gates in 1975, also recently scraped by expectations. At year-end 2022, Microsoft reported its weakest growth in more than six years. Sales increased by only two percent, and net profit even dipped by twelve percent year-on-year. One bright spot is the promising cloud business, which expanded by almost a third.

Investing with the handbrake on

Tech companies are not sitting idle in the face of the recent deterioration in growth prospects. In order to keep the returns going, numerous companies such as Amazon, Meta, Microsoft, Twitter and Alphabet have already announced extensive job cuts. The savings could soon be felt, especially since numerous experts believe that the economic headwinds will ease in the second half of the year. This is also reflected in the analysts' forecasts: While the IT companies in the S&P 500 are still expected to post a 12.2 percent drop in profits for the first quarter, full-year results should show a small increase of one percent. In 2024, growth of 11.8 percent is then expected not only to pick up noticeably again, but also to exceed that of the overall market as measured by the S&P 500.

Performance of selected US tech companies share price over 5 years

Source: Bloomberg & Vontobel, Observation period 26.03.2018- 23.03.2023 Note: Previous value developments and simulations are not reliable indicators of future value developments.

However, the overriding direction for tech stocks is likely to be the development of capital market interest rates. The U.S. Federal Reserve has not yet given the all-clear. So until all the uncertainties are cleared up, stocks could well take another breather. At its last meeting, the U.S. Federal Reserve (Fed) raised the key interest rate by 0.25% to a range of 4.75-5%. The Fed is still trying to contain inflation. However, the peak is expected to be reached soon. According to the expectations of the Fed's 19 monetary policy makers, the median interest rate level at the end of 2023 is 5.1% (as of 03/22/2023).

In this environment, it may make sense to engage in the segment in a yield-optimized manner for the time being. With selected barrier reverse convertibles, attractive returns can already be achieved with sideways trending or moderately falling prices.


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