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Some of the biggest names in tech were among the stocks getting swept up in the market volatility of 2022. Will this year be different? Greg Bonnell speaks with Vitali Mossounov, Global Technology Analyst with TD Asset Management, about the key themes for tech stocks in 2023.
Transcript
Greg Bonnell: After a multi-year run of strength, technology stocks have been on the back foot more recently. So what hurdles will they have to clear if they are to regain some market leadership? Joining us now with more, Vitali Mossounov, global technology analyst with TD Asset Management. Vitali, always great to have you on the show.
Vitali Mossounov: Always great to be with you, Greg.
Greg Bonnell: So let’s talk about those tech stocks. Obviously, there’s a lot of disappointing pockets of the market last year– tech among them. What do we think the setup is for this year?
Vitali Mossounov: Used to be like clockwork. Remember in 2017, ’18, ’19, ’20, tech outperforming the market. So you could make that bet. You could set your watch to it, and it’ll happen. ’21, things started to change. You remember kind of a tale of halves there, right? First half of ’21, tech still a strong outperformer. Second half of ’22, that’s where you’re getting inflation talk. That’s where you’re getting rates. And so ’21, the second half, weaker. ’22, the wheels fell off.The wheels fell off of tech, as you said– 10 percentage points of underperformance. And so ’23 for me, is really a make it or break it year. It’s the litmus test year for tech.
Greg Bonnell: All right. So if it is a litmus test here, it suggests that there’d be some sort of benchmarks that we’re looking for. If you’re applying a test, where the standards of that test?
Vitali Mossounov: Tests should have standards, and we’ll put a couple of standards on this test. Number one, we’re going to be watching if these businesses, especially of course, the big tech, they just dominate. So we’re going to refer to them off when we’re talking about technology. But can they continue to grow at that GDP plus rate? Can they continue to grow faster than the rest of the companies in the S&P 500?Something that we’ve taken for granted year after year after year. And by the way, that’s baked into their valuations. Even after a bad year, these stocks still trade at a 20% premium to the S&P 500. So they’ve got to deliver. And there’s some disbelief right now. Because remember, what did ’17, ’18, ’19– what did all these years have in common? Expansionary years. How are these stocks going to do in a recession? So we’re watching the top line, and whether it’s defensive, number one.
Greg Bonnell: So top line is number one– suggests that there is a number two. I’m going to– I don’t want to front run your answer, but I think maybe some of these companies have made commitments on number two?
Vitali Mossounov: Well, they’re making comments about it. And they will tell us that they’re not commitments, that they’re comments. And we’re going to find out shortly. Earnings start next week. We’re going to find out if they’re comments, or commitments, or something else. And the nature of their comments will move stocks. And so number two, of course, is cost discipline.I’m going to harp on this, but in those Goldilocks years when the economies were expanding and technology companies were taking market share from the other parts of the economy, costs didn’t matter. Everyone was transfixed on growth, and rightly so at that point in time. But when everyone’s transfixed on growth, the companies become a little let’s call them undisciplined. They take it for granted they could spend that extra million or billion, in their case, on some fancy project that may not be so necessary. And so investors are trying to send a message right now that show us that cost discipline. Because it just hasn’t existed for the last few quarters for sure.
Greg Bonnell: Now, of course, cost discipline can often mean layoffs. And we did get some of those announcements in terms of some of the big mega tech. Beyond layoffs, I mean, what else can they do to start reining in costs?
Vitali Mossounov: Well, in fact, layoffs are going to be the primary way that they do it. And takes something like Meta, for example, which ties back all the way to third quarter results. They report and announce all sorts of spending, including on the Metaverse, of course. It’s their project. They kind of stake the whole company on sometimes. But they came out and said, look, things are tough out there in advertising land.But we’re going to continue with the CapEx plans. We’re going to continue with the OpEx plans. And we just need to do this. And the market, you might recall, punished them severely. The stock was down over 20% the day after earnings. And shortly thereafter, that investor pressure, I think, caused perhaps a change in sentiment all the way at the founder level.Because in early November, Mark Zuckerberg was out there saying that we will get costs under control. And sadly– but this is the way the business models work, they will be laying off 11,000 staff. For a company of 87,000, that’s a big number. So staff is the number. It’s a labor business.
Greg Bonnell: It seems that Facebook in that example was getting the message from the market. Are the other big tech names, you think, getting the message from the market in terms of cost discipline?
Vitali Mossounov: We’ll see. Again, there’s no hard commitments yet. There’s comments, because they were punished so severely after third quarter results. But I would say that on balance, every single one of the big tech businesses has made encouraging statements that they are coming around to the side of the shareholder. Amazon is a good example. They have also been out there talking up operating discipline, and the ability to take and rein in costs. Before, it was always at the retail level. But now, there’s signals that even at the corporate level, they will be open to reducing their headcount.Microsoft certainly may arguably be making the strongest statements out of the group– Microsoft out there saying that they will be able to keep head count roughly flat the entire year. That’s after a year of 20% growth in their fiscal 2022. And I suppose the last but not least, Apple. Now this one is a bit of an outstanding question for me.Apple has been most resilient on the top line throughout last year. And so I find that the focus on their costs from investors is not as severe as it is for the other businesses. So I wonder if they will get the message. Although even Apple has made encouraging comments, and of course, we saw Tim Cook take a pretty large pay cut actually down to, I think, only $49 million for the upcoming year.
Greg Bonnell: Hard to get by on just $49 million. But I’m willing to give it a try. When we talk about sales and profit overall for the industry, I think you have a graph for us in terms of where the trend lines have been moving. Maybe we’ll show the audience and sort of walk us through what we’re seeing here, and what it may suggest going forward.
Vitali Mossounov: Yeah. And it’s a simple chart, but it tells the entire story. And it’s that the line you’re seeing on top is the revenue growth line for the last few quarters. And you can see that. We’ve seen the impact from a softening economy and pandemic pull forward in some cases. Revenue growth is slowing. And it’s normalizing here in the 5%, 6%, 7% range, right? As I said, that’s this GDP plus level. That’s fine. People will take 7% in this environment when things are getting so tough.The problem has been that you’re getting 7% revenue growth. But the company is saying that, well, but I’m not going to give you 7% earnings growth. I’m actually going to give you– that’s the bottom line– 20% earnings declines. So you’re being robbed as a shareholder, because all this extra money is going into the difference, which is whether it’s servers, or typically, as we said people. And so that’s what needs to change. It’s that cost line and that margin line. That really needs to go up because it’s unacceptable to investors that the spending levels are so profligate if you, will.
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