Perhaps the highlight of the exuberance in this period was the runaway valuations given to “earningsless” tech companies that de-SPAC’d and IPO’d — in many cases seeing features becoming publicly traded companies and poor- to modest-performing tech names with no profits trading at exorbitant revenue multiples.
Some tech names have seen valuations fall more than 75% from their pandemic-fueled highs. Companies including Zoom
ZM,
-2.69%,
Peloton
PTON,
-3.79%,
Twilio
TWLO,
-2.95%,
Snap
SNAP,
-9.44%
and Roku
ROKU,
-1.63%,
to name a few.
We have heard some analysts go as far as to compare the current market to the “dot-bomb” crash of 2000. That’s a clever comparison for headlines, but it lacks any basis despite the massive declines during both periods.
Nope, it’s not the dot-bomb crash all over again
Before we look further into the prospects for technology and the critical role it stands to play in the subsequent recovery, it is worthwhile to take a moment to contrast the “dot bomb” crash from today’s tech environment.
While a handful of low-quality tech companies went public over the past few years, I believe the only significant commonality is the trillions of dollars of wealth that have been wiped out over the past several 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 path to profits. Many were just “dot com” versions of physical retailers selling toys, pet supplies or also-ran internet search companies. Of the 457 IPOs in 1999, 117 saw their share prices surge more than 100% on the first trading day. When the Nasdaq finally bottomed around October 2000, the Nasdaq had lost 78% of its value, and a large swath of companies would fail in the months to follow.
In this downturn, many of the companies mentioned with significant share-price declines, such as Zoom and Twilio, are still showing considerable revenue growth and profits. There’s an argument that the pandemic rapidly pulled growth forward and shot share prices up artificially, but the underlying companies are real businesses with customers, growth and, in many cases, profitability — a stark contrast to the wake of the dot-bomb era.
We must ‘tech’ our way out
Over the past several weeks, I have had an opportunity to sit down with the CEOs of many tech companies, including Marvell
MRVL,
-2.75%,
Dell
DELL,
+0.73%,
IBM
IBM,
-0.31%,
Intel
INTC,
-0.29%,
SAP
SAP,
-1.30%,
Hewlett Packard Enterprise
HPE,
-1.20%
and Five9
FIVN,
-5.23%.
I have made a point to ask each of them about current macro conditions — inflation, war, interest rates, tight labor markets, supply chains, etc. Of course, all CEOs are paying careful attention to the macro environment, but a key theme has emerged in conversations:
Technology will provide the key ingredients to solving many of the challenges.
While Cathie Wood hasn’t been very popular among investors in the wake of the Ark Innovation Fund
ARKK,
-2.91%
falling more than 70% from its all-time highs, her thesis of the longer-term impact of technologies being the answer to many of the world’s most considerable challenges in health care, finance, cybersecurity and climate has merit.
In other words, automation, cloud, software as a service (SaaS), artificial intelligence (AI), communication and 5G will optimize businesses, reduce the risk of fraud and cybercrime, automate menial tasks and improve workflows, and enable innovation through higher throughput and lower latency connectivity. The supply chain will require diversifying manufacturing and utilizing big data and AI to optimize material sourcing, product assembly, shipping data and more.
The companies that enable these technologies will be paramount to the future, and the associated equities should find footing sooner than later as this becomes increasingly evident.
Tech earnings were much better than expected
The past month of tech earnings has been much better than most expected. While there have been a few surprises to the downside, like Amazon’s
AMZN,
+4.40%
surprise miss, most tech companies did reasonably well. Even guidance largely held up despite the rumblings of economic collapse.
Early in the earnings wave, enterprise-heavy tech companies like IBM and Microsoft
MSFT,
-0.50%
had another outstanding quarter. Apple
AAPL,
-0.53%
came in well above expectations as well. Almost all the chipmakers outperformed expectations, with companies like Qualcomm
QCOM,
+2.48%
and AMD
AMD,
-0.39%
having record results. This past week, we saw Nvidia
NVDA,
-0.74%
show record results despite crypto and gaming concerns. Marvell had an absolute blowout result, and Dell Technologies delivered a huge upside surprise, spurred by solid performance in its data center business.
Tech companies that will thrive
If you look at recent results, it is hard not to spot a trendline between enterprise-technology companies and substantial performance numbers.
While Apple is a juggernaut, despite its continued concerns about supply-chain issues, it keeps beating expectations.
This quarter delivered robust results for enterprise software and technology companies that could address the needs of businesses looking to invest in IT infrastructure, software and technology to enable their businesses to become more efficient, productive and customer-centric.
Some companies to watch.
Microsoft: Its wildly diversified portfolio, cloud business and business applications portfolio make it a staple to almost every enterprise.
ServiceNow
NOW,
-1.85%: Last week at its investor day, the company provided a bullish outlook, targeting $16 billion in recurring revenue by 2026 as companies invest in workflow and process automation.
IBM: If the VMware and Broadcom deal excites investors, a company like IBM, which owns Red Hat, should have an allure. IBM has also held up exceptionally well during the tech downturn.
Qualcomm: Almost every 5G device on the planet somehow ties back to Qualcomm. Between its growing diversification into auto and the internet of things (IoT) and its handset licensing agreements with every OEM/ODM globally, the company has a bright future.
Nvidia: AI is a board-level priority at nearly every enterprise. Nvidia’s data center business grew 83% last quarter and has become its most prominent business segment, surpassing its gaming revenue.
Daniel Newman is the principal analyst at Futurum Research, which provides or has provided research, analysis, advising or consulting to Nvidia, Intel, Qualcomm and dozens of other companies. Neither he nor his firm holds any equity positions in companies cited. Follow him on Twitter @danielnewmanUV.
