- Meta is cheapest big-tech play
- Major job cuts in progress
Shares in the US technology giants have undergone a significant de-rating, with some previously highly-rated companies now priced at a lower multiple than the wider S&P 500 universe. Investors are now tasked with judging whether job cuts and other defensive measures will do enough to protect profitability
Technology stocks endured a torrid 2022, with rising interest rates depressing future cash flow expectations. Meanwhile, the sector has kicked off 2023 facing legal headaches and most of the majors are cutting jobs as the economic environment worsens.
Meta Platforms (US:META), ostensibly the cheapest of the technology giants, has already become a value stock. The forward price/earnings (PE) ratio of the virtual reality company has fallen from 26 times at the start of 2021 to 16 times, below the 17 times at which the S&P 500 index trades..
On top of slowing growth and investor concerns over the metaverse, there is another headache: Meta's advertising revenues in Europe could be hit after the European Union’s personal data regulator found that the company had broken privacy regulations and fined it €390mn (£345mn). Ireland’s Data Protection Commission said Meta must “bring its data processing operations into compliance within a period of three months.”
On the face of things, the next- cheapest big technology option is Alphabet (US:GOOGL). Its forward valuation has fallen from 31 times last year to 17 times, to sit at the same level as the market. Microsoft’s (US:MSFT) rating is also down heavily, from 34 to 21 times forward earnings over the past year. Both companies are spending heavily on cloud computing, but previously rapid growth rates are starting to slow as customers cut costs.
Apple’s (US:AAPL) market cap, meanwhile, is now below $2tn, having peaked at $3tn at the start of last year. The contraction has been driven by supply chain issues in China, with iPhone production hit by stringent Covid-19 regulations in the country (which have recently been relaxed). Employee protests at Taiwanese manufacturer Hon Hai Precision Industry (TW:2317), the impact of a stronger dollar and the wider macro environment have also had an impact.
The Financial Times reported that Apple would engage with Luxshare Precision (CH:002475) in a bid to diversify its manufacturing base in China, which could bring some relief. Apple’s shares trade at a slight premium to the market, at 20-times forward earnings.
AJ Bell investment director Russ Mould said of the sell-off in technology shares that “there is a danger that lofty valuations have simply caught up with them".
"Those who are tempted to argue that 2020-22 featured [a] bubble, blown by cheap central bank liquidity, may hark back to the bursting of the last tech bubble in 2000. The Nasdaq peaked at 5,049 in March 2000 and then took 15 years to get back there, so extreme had valuations and high expectations become”.
The pivot has big implications for the technology labour market. After a period of expansion and hiring sprees, the second half of last year saw big layoffs, with social media technology company Snap (US:SNAP) cutting 20 per cent of its workforce in August. Such moves are continuing. Amazon (US:AMZN) chief executive Andy Jassy pointed to the “uncertain economy” in a blog post this week as he confirmed that the company would shed 18,000 jobs, the biggest cull in its history, mainly across the online store and its people, experience and technology division.
The overall level of cuts at Amazon was higher than expected by the market, after the company flagged in November that headcount reductions were being planned. Amazon is the most highly rated big technology company, with the shares trading on a consensus 46-times forward earnings, though analysts expect this to fall sharply.
The news emerged shortly after software company Salesforce (US:CRM) chair Marc Benioff said in a letter to staff that the company would cut 10 per cent of its total workforce due to over-hiring and customers cutting back on spending.
RBC Capital Markets analyst Brad Erickson saw Amazon’s job cuts “as putting an increased spotlight onto [Alphabet] in particular. Management has yet to concede headcount reductions as a means to offset the known headwinds going on in the advertising business”.
Alphabet investors have already called for big cuts. "Our conversations with former executives suggest that the business could be operated more effectively with significantly fewer employees," TCI managing director Christopher Hohn wrote in public letter to Alphabet's chief executive Sundar Pichai in November.
Meanwhile, Tesla (US:TSLA) shares continued their slide after the company missed delivery expectations. The carmaker delivered 405,000 vehicles in its fourth quarter to the end of December, an 18 per cent uplift on the third quarter but below the 420,000 minimum expected by analysts. Like its big technology peers, the company’s rating has come down heavily. It currently trades at 21 times forward earnings, according to FactSet – far below its five-year average of 109 times.
