Tech investors get a big wake-up call in 2022: Tech stocks could fall! Rewarded by a decade of low interest rates, lots of innovation and the pandemic, tech stocks have soared over the past decade.
However, emerging from the pandemic and last year’s interest rate shock, tech stocks had a major correction. Many new tech companies that have entered the market in the past few years have dropped 70 percent or more, even profitable blue-chips. Microsoft (MSFT -2.20%) Including dividends, it fell 28 percent last year.
After Microsoft’s December quarter earnings report, the stock initially fell when investors saw the company’s overall growth rate drop to 2% and management predicted a significant slowdown in cloud growth for the current quarter.
Still, investors now seem to be looking at attractive long-term positives in this downturn and for Microsoft and the technology industry as a whole. As a result, Microsoft rallied late last week and ended the week up 3.3% on the back of these three long-term positives.
Digital transformation to sustainably grow beyond GDP
While many market forecasters have declared the technology business “dead” and are favoring other sectors, Microsoft CEO Satya Nadella continues to focus on digital transformation. Cloud-delivered software and breakthroughs in super-computing have already brought significant changes to the overall market. Between 2010 and the end of 2021, technology increased as a percentage. S&P 500 (^GSPC -1.30%)An increase in weighting to 37.5% from 23% to 42% of the index before last year’s decline.
Some argue that digital spending as a percentage of GDP is only increasing… Technology can return to other sectors as a percentage of GDP, Nadella continued to believe. and on a secular basis.”
For example, despite the current slowdown in Microsoft’s most important cloud segment, Nadella thinks cloud computing remains in the “early innings,” noting that customers are running twice as much on Microsoft’s cloud than they were before the pandemic. Nadella said usage of various Microsoft applications has continued, although new seat growth has been more challenging as businesses return to hiring.
But the cloud helps organizations do more, run more efficiently, and keep technology costs down, as opposed to having to build and manage their own data centers. Nadella pointed out that since the pandemic has accelerated, customers are now ramping up workloads so that they can work as efficiently as possible. However, once that’s done, Nadella predicts that customers will eventually start adding new workloads, perhaps within a year.
While growth in the Azure cloud will no doubt be offset by a larger revenue base, it should maintain long-term high growth rates relative to the rest of the economy.
AI is not just a fad
This was Microsoft’s first earnings call since the public release of OpenAI’s ChatGPT chatbot on November 30. Whether this high-powered AI tool is revolutionary or just a passing fad with limited capabilities is a big debate today.
If it’s the former, that could usher in a new era of growth for companies dealing with AI, as well as semiconductor companies catering to AI’s massive computing needs.
In the conference call, Nadella said that more than 200 Microsoft customers had tried the service within a week of launching the OpenAI service on Azure. More than a million people have used Github Copilot, an AI-enabled assistant that helps developers write code. Although much of the focus has been on how ChatGPIT will improve Microsoft’s distant secondary search service, Bing, Nadella said, “Fundamentally, I think it’s going to be something that drives innovation and every bit of competitive differentiation. Microsoft’s solutions by leading in AI.”
There’s a school of thought that says AI may have crossed the threshold to become highly effective for a variety of use cases for the first time this year. If this is true, it will make the tech sector even more important than it already is.
Image source: Getty Images
PCs are in historical decline but they have to bounce back
The biggest driver behind Microsoft’s slowing growth has been a sharp decline in its PC-related divisions, including its Windows operating system and home Surface hardware products. Last quarter, Microsoft’s Windows and Devices segments each fell 39 percent. This is perhaps no surprise as a research firm. Gartner PC shipments fell 28.5% in the fourth quarter of 2022, the largest since Gartner began tracking shipments in the mid-1990s.
And yet, there is some evidence that the telecommuting trend may have staying power. Nadella said that while shipments are undergoing a sharp correction, the installed base of Windows PCs is at an all-time high and usage per PC is 10% higher than before the pandemic.
As many consumers and companies install new PCs in mid-2020 and 2021, most are putting off new upgrades in 2022 and the early part of 2023, especially since everyone is looking to limit spending everywhere. You can.
However, if PC usage continues at these elevated post-pandemic levels, that elevated installed base will eventually need to be restored. So while the sales numbers of 2020 and 2021 may not return, PC sales should at least stabilize at 2019 levels and possibly reach higher levels from 2019 onwards.
Higher for a longer period of time
Although the tech sector will see a violent correction in 2022, 2023 revenue and earnings will be largely lacking in the sector, but the use of technology and its importance to businesses and consumers is still on the rise. This means that the technology sector should still be a sector that is planned to develop long-term growth investors.