Fund managers are struggling to find the right price for technology stocks, although US retail investors are happily buying back into tech stocks as falling inflation expectations have provided a tailwind for the country's equities since the turn of the year. This is despite several profit guidance misses from the biggest technology companies, which are cutting tens of thousands of jobs and dialling back some growth spending.
Currently, the receding fear of entrenched inflation is winning out. After a miserable 2022, the S&P 500 is up 7 per cent and the Nasdaq has risen 13 per cent so far this year. This rally has been driven by a few of last year’s unloved companies. Netflix (US:NFLX) , Tesla (US:TSLA) and Meta (US:META) are up 18 per cent, 40 per cent and 82 per cent respectively. The Ark Innovation ETF (ARKK), which was a symbol of the tech stock bubble in 2021 when it hit over $150 (£125) a share before crumbling to $30 by the end of 2022, is now back up almost 30 per cent year-to-date. Even Coinbase (COIN), the cryptocurrency exchange, is up 70 per cent this year (it remains down by the same percentage in the past 12 months, however).
Blue Whale Growth managing partner Stephen Yiu is sceptical the underlying investment case for many of these businesses has changed this year. “Has Netflix’s earnings fundamentals for the next five years changed? Probably not but it is still up a lot,” he said.
Blue Whale Growth sold out of Amazon (US:AMZN) and Alphabet (US:GOOGL) last year on the thesis that consumers would suffer in the recession. “We are still very bearish on consumer technology and advertising. The higher mortgage rates haven’t even kicked in properly yet and digital advertising is unlikely to keep taking market share at the same rate,” he explained.
Yiu’s theory played out last week in the results of the US’s biggest technology companies. Apple (US:APPL), Amazon and Google all missed analyst forecasts and saw profits drop substantially. Meta was the only positive surprise with its revenue shrinking slower than expected. It also announced it would be able to cut more expenses that originally thought. But it was hardly bullish.
In the short run, Yiu accepts that interest will drive markets. However, he has faith that earnings growth is what matters in the long run. He cited Microsoft (US:MSFT) - a company Blue Whale has a position in – as an example. “Its share price has fluctuated but in the last five years its earnings have grown around 200 per cent and so has its market cap”.
The other factor that can drive share prices in the short run are retail investors. A JP Morgan report found that January had the most retail investors activity since last summer. The investment bank has a “retail favourites” index which has shown a strong recovery this year relative to the S&P 500. “This relative performance proxy rebounded in recent weeks pointing to a re-risking by younger cohorts,” wrote the bank.
Despite the recovery the market is still down heavily from last year and Yiu was keen to point out that its easier to grow faster from a lower base. The surprisingly strong jobs report from the US which showed record low unemployment has also triggered a sell-off in the last few days. The 10-year US Treasury yield is up 30 basis points and correspondingly the market has given up some of its gains. Whether US retail investors stick around a bit longer this time is yet to be seen. But they should be more hardened after last year.
