If you have turned to this column for words of encouragement about the tech outlook for the second half, I apologize in advance. You’ve come to the wrong place. Things almost certainly are going to get worse before they get better.
Sure, the risk level is lower than it was. The
is down about 28% in the year’s first six months—that’s a lot of derisking. And yes, some of the individual losses are just breathtaking.
(MSFT) are all down more than 22%.
(AMZN) is off 36%, and Facebook parent
(META) is 51% lower.
(NVDA) is down 47%, while Advanced Micro Devices (AMD) is 46% lower.
So, yes, stocks are cheaper. But not necessarily cheap.
One gigantic problem is that earnings forecasts for the back half of the year haven’t really budged, and don’t reflect the evolving macroeconomic picture, which includes interest rates that continue to ratchet higher, sky-high fuel prices, ongoing logistics snafus, uncomfortably high inflation, and growing expectations that we’re heading for a recession. You can throw into the mix Covid, Ukraine, and unfavorable foreign-exchange rates.
Over the past week or so, tech analysts have been rushing to slash estimates on a wholesale basis, but with June-quarter earnings reports now just weeks away, they can’t move fast enough.
The memory-chip company
(MU), which reported financial results Thursday afternoon, provided a vivid illustration of the problem. While May-quarter results were fine, guidance was not. Micron expects revenue for its August quarter of $7.2 billion, nearly $2 billion below the Street consensus. Micron’s chief business officer, Sumit Sadana, explained in an interview that a key issue was a sharp slowdown in demand for PCs and smartphones, in particular in China. Sadana said the company’s forecast on China demand for the August quarter dropped by 30% in just the past few months. That translates to a 10% drop in Micron’s overall sales outlook.
In short, economic conditions have eroded far more sharply than companies and analysts expected. The implication is that earnings reports this time around won’t be great, and guidance will be terrible. The only question is how much stocks already reflect the worsening conditions. While that’s hard to say, I would note that the Street had widely anticipated weak guidance from Micron, and the company still managed to surprise to the downside, and the stock sold off.
Some analysts are rushing to get ahead of the story. J.P. Morgan analyst Doug Anmuth, for instance, last week cut estimates and price targets on 26 internet stocks. Anmuth notes that inflation hit a 40-year high in May, fuel costs are up 45% since early February, and credit-card data show slowing consumer spending.
Anmuth made the biggest cuts on online advertising and e-commerce plays. He notes that ad spending is “highly correlated” with gross domestic product, and that ad agencies have trimmed their 2022 forecasts for ad spending. Anmuth points out that during the 2008-09 recession, digital channels were just 12% of overall ad spending; they were 67% in 2021, “making online spend now far more exposed to broader macro trends.”
The outlook is no brighter in the enterprise arena. Evercore ISI analyst Amit Daryanani asserted in a research note this past week that in a recession, the hardware and software stocks he tracks could be vulnerable to declines of 30% to 40%, based on how they fared in the 2008-09 downturn. He sees risks of substantial price declines for a host of high-profile stocks, including Apple,
(HPQ), Hewlett Packard Enterprise (HPE),
And what about semiconductors? Won’t recent shortages and huge backlogs protect them? Well, no, says BofA Global Research analyst Vivek Arya. This past week, he trimmed his forecast for global 2022 chip sales growth to 9.5%, from 13%. For 2023, his new forecast calls for a 1% decline, rather than the 7% growth he’d previously projected.
“Semi downturns happen every three to four years, and we could be due for another one,” Arya writes, arguing that tighter global monetary policy, geopolitical turmoil, and consumer weakness are likely to pressure chip demand through 2023. He sees risk that softness in consumer sectors like PCs, 5G phones, and gaming video cards could spread into the data center and enterprise markets.
On the other hand, he notes that chip stocks tend to bottom six to 12 months before fundamentals—and that the group could begin to perform better in the third quarter. He advises playing three structural trends: the growth of cloud computing, the opportunity in electric and autonomous vehicles, and the growth in capital spending to expand chip-making capacity.
Arya has a point. If you are going to bottom-fish, pick stocks where the macro issues should be just a speed bump. The cloud computing story, for instance, clearly remains a powerful one. Alex Haissl, an analyst with the U.K.-based research boutique Redburn, this past week recommended Amazon shares on the theory that Amazon Web Services is worth $3 trillion, or almost triple Amazon’s current market cap.
But whatever your long-term view may be, you need to brace for a couple of tough quarters ahead.
Write to Eric J. Savitz at [email protected]