Could tech stocks lose their shine in 2022?
If you wanted to put money in the stock market over the past five years, then a sure-fire bet has been to invest in US tech stocks, which have significantly outperformed the wider markets.
That divergence in performance has been particularly noticeable since the start of the pandemic, as the crisis spurred new ways of working which benefitted tech stocks (think Zoom) and impacted many “old economy” models.
Yet the question is whether this will continue into 2022. Leaving out the Chinese tech names – whose problems stem from the country’s political and regulatory environment – it is clear investors are becoming more sceptical of many of the players involved.
Take Snap. On a one year view (to 3 January), shares may have only dropped around seven per cent, but the shares are down approaching 40 per cent since their third quarter results when it warned of the growing impact of Apple’s privacy changes.
Other previously high profile names have also taken substantial hits. Zoom shares are down almost half in a year as is Just Eat Takeaway. Other delivery names have fared slightly better but have still fallen – Uber is down nearly 15 per cent, with Lyft not much better.
Meanwhile, other big names have lagged the wider market. Amazon shares are up just under five per cent over a year against an S&P 500 up close to 30 per cent. Meta lags, too.
The growing doubts are apparent in the performance of several high-profile tech IPOs in the UK. Probably, The Hut Group has been the most extreme example of where investors have turned against a story yet it is also prevalent in other tech names, such as Deliveroo – which is trading significantly below its IPO price – and Darktrace, which has seen a tumultuous ride since the publication of a negative analyst note by Peel Hunt.
The poor performance of these high-profile IPOs has reignited the debate over whether UK fund managers “get” tech. Yet this is not just a UK issue.
Globally, several high-profile tech IPOs in recent months – such as Asian “super app” Grab (down over 20 per cent on its first day of trading), Indian digital payment firm Paytm (down 27 per cent on day one) and (to a lesser degree) Weibo, which also fell on its first day – have all fallen prey to the increased scepticism of the market. The times tech IPOs generally enjoyed strong first day rises seem to be over.
There has been a multitude of reasons for these poor share price performances. Some factors were outside the tech companies’ control – for example, valuations were boosted by perceptions that ultra-low interest rates would last for a long time – and that view is changing.
There has also been some sector rotation to “old economy” names and there are increased political and regulatory concerns, although no one expects the same sort of reining in as in China.
There is no doubt though that there is growing scepticism of whether certain businesses will ever reach the profitability levels needed to justify their valuation.
It is clear Apple’s privacy changes are now starting to have a meaningful impact on the business models of companies such as Snap and, to a lesser degree, Meta.
Uber may have crept into EBITDA profitability on an adjusted basis but its growing problems in terms of service, competition and regulation threaten to never deliver the payback needed to justify years of multibillion dollar losses. The food delivery services – such as Just Eat Takeaway and Deliveroo – seem to be stuck in continual rounds of competition and investment, with no clear leader emerging in many markets.
However, for investors looking at tech, the best advice to remember is that, like in most of life, things are rarely black or white but often varying shades of grey.
Some tech companies have done phenomenally well in 2021 – Alphabet’s Google is up more than 60 per cent in a year, Microsoft over 50 per cent
and even Apple up more than a third.
The key is to find those companies with excellent long-term growth prospects and few risks – Microsoft stands out, for example. Expect those types of shares to do well. For those companies whose business models are less robust, the markets are likely to remain choppy.
However, with investors showing a greater level of discernment over tech companies in which they invest, we should take this growing divergence in performance as a major positive. Onwards to a prosperous 2022.