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Revenge of the traditional economy: why big tech companies are losing their magic in the stock market

Latest NewsRevenge of the traditional economy: why big tech companies are losing their magic in the stock market

Elon Musk’s offer to buy Twitter made the social network an exception to the sharp drop in tech stocks on the stock market in 2022. left the operation up in the air. After several years of unstoppable growth in the Nasdaq tech index in the US, sell-offs and distrust have subsided among investors who are turning away from growing companies and finding refuge in so-called value stocks, such as food and beverage companies that can withstand bad times. times already indicated by some macroeconomic variables. Money is also pouring into energy, lured by high fossil fuel prices and the transitional green revolution. A change in course, accelerated by a turn of the helm in central banks, which analysts at the American bank Goldman Sachs rightly dubbed “revenge of the traditional economy.”

The Nasdaq is up 26.6% in 2021 and has already lost 28% of its value over the year. Analyst David Galan, director of the General Stock Exchange, considers it necessary to distinguish between technology stocks: “On the one hand, large companies such as the so-called FAANG (Facebook, Amazon, Apple, Netflix or Alphabet). , with abundant and constant profits, and on the other hand, small and medium-sized ones, many of which still do not have advantages and where speculation has been more incited in recent years. Gains of 100% a year have been commonplace for these lesser-known stocks, helped by money from small investors working from their covid-19-constrained homes. The boom in cryptocurrencies and growth stocks of the past two years fit this pattern along with the fever of so-called Spacs, listing shells they invested in without knowing which companies they would end up acquiring. Blindfolded investment.

Echo 2000

An example of this genuine small-value-focused bubble that is very reminiscent of the 2000 dot-com crisis could be Rivian, an electric truck and pickup maker whose price dropped 78% in just over four months of its value. But there are numerous cases. As management company Carmignac points out, the celebration of these values ​​has now come to an end. “We remain wary of money-losing tech companies as, in a higher rate environment, investors are unwilling to fund growth with profitability,” the French firm said.

There were also many losses in the shopping centers of large businesses, although everything is different here. Meta Platforms (the parent company of Facebook) lost 43.5% over the year, Paypal (-62%), Amazon (-37%) and Netflix stand out, which by 2022 left 71% of its capitalization. The most moderate declines correspond to Apple (-21.6%), Microsoft (-23%) and Alphabet (-22.1%).

Olivier de Berranger, investment director at La Financière de l’Echiquier, analyzes the misbehavior of these giants in a recent report. “The closure of operations in Russia hit the accounts of Alphabet, Meta Platforms and Apple for the year as a whole, and also reduced advertising revenue in almost all markets,” says the French manager. “Apple reported higher-than-expected revenue but revised its Q2 targets due to weaker demand in China due to its coronavirus zero plan. Amazon was hit by rising wages and transportation costs, which led to a loss in the first quarter. And Microsoft is an exception as it continues to capitalize on the drive to digitize its Azure cloud platform, revenue growth at LinkedIn and its Surface Computing Devices division.”

He thoroughly knows all sides of the coin.


Amazon’s $3,844 million loss in the last quarter was a blow to the sector as investors are now starting to get serious about valuing these companies, whereas before it didn’t matter much: they always went up. So, in addition to the challenges of the economic downturn and the once-benefit that the covid-19 lockdown has brought to many of these businesses, higher interest rates are another major reason for their loss of attractiveness. As David Galan explains, these companies are valued based on the expected annual growth in their results for several years ahead, and the denominator is a free discount rate, marked by changes in interest rates. The rise in the price of money in the Western world, and especially in the United States, causes a decline in the valuation of these companies, which explains the fall in the stock market.

Goldman Sachs notes that if long-term interest rates remain at current levels (3% for a 10-year bond) or rise even more, “it is unlikely that buy recommendations will return to the technology sector: there is more risk here.” this rate normalization will push the valuation down further, especially if earnings growth is not enough to offset these higher rates.

The decline in prices for these shares slightly increased their valuation, bringing them closer to industrial ones. The number of times the price contains the benefit (PER) of large technology companies is currently 27 times, and in a large comparable industry it is 17 times. It may be excessive, although we are talking about companies with great growth opportunities. However, just 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 have already received ideal prices, and any challenge to this growth assumption will reveal the absence of an anchor in their prices. That seems to be the case now,” concludes Daniel White, manager of M&G.

Buy or run?

The money world has begun to shift from technology-led growth stocks to safe and secure income stocks (consumer, energy companies), and it will be hard to see a radical turnaround in the coming months. In addition, higher interest rates mean lower valuations for tech companies, and further rate hikes are expected for now. But the price penalty has been significant, and pundits are beginning to show interest in some companies. For example, David Galan of Bolsa General is banking on cybersecurity and software companies at the current level. “In cybersecurity, we expect strong growth, and subscription payment models like Microsoft’s are a constant and safe cash flow. Also companies like Alphabet that operate in a quasi-monopoly mode,” he explains. Goldman Sachs says it’s overweight in tech and is betting on automation software and tech-driven healthcare companies. So yes, trust me, this is a moment of active management and highlighting a lot of values. For fund manager Fidelity, companies like Ericsson, Samsung, Alphabet, Intel, Infineon, Activision, Netflix, IBM, and Analog Devices are all part of its tech portfolio due to the massive growth of 5G, AI, electric vehicles, and more bring video games or robotics.

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