Tech stocks have been showing a lot of volatility in the past couple of weeks amid earnings reports from some Big Tech names. These stocks have heavy weightings in the broader indices, and therefore possess the potential to move the markets. In other words, they can lead a market recovery or downturn.
The Invesco QQQ Trust (NASDAQ:QQQ), which tracks the Nasdaq 100 Index, advanced over 27% in 2021, capitalizing on the rally in high-profile tech names. With the tech rout seen at the start of this year, the fund has pulled back to under $350. It’s been swaying to the tunes of the earnings reports.
To their credit, most tech stalwarts navigated the supply chain constraints without much of an impact. This is evident from the strong top-line growth reported by many Big Tech companies.
As the earnings impact wears off, these stocks — some of which still sport heady valuations — could look toward fundamental and macroeconomic cues for direction. Monetary policy normalization is hanging like a Damocles’ sword. The uncertainty surrounding the timing and pace of Federal Reserve rate hikes is casting a cloud on the outlook for tech stocks.
A higher-interest environment makes investment in these overvalued tech stocks a less appealing proposition and could engender additional sell-off in the space. That said, fundamentals of most Big Techs point toward the sustainability of multi-year growth. This would serve to cushion any potential downside triggered by the macroeconomic headwinds.
The Street is underestimating the underlying growth of tech companies. This differential between the actual and potential valuations will help offset some of the perceived Fed tightening headwinds, Wedbush analyst Daniel Ives said in a recent note.
Against this backdrop, here are a few winners and losers from the reporting season among tech stocks and how their near-term trajectories will likely pan out:
Tech Stock Winners:
- Apple (NASDAQ:AAPL)
- Advanced Micro Devices (NASDAQ:AMD)
- Amazon (NASDAQ:AMZN)
- Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL)
- Microsoft (NASDAQ:MSFT)
Tech Stock Losers:
Tech Stock Winners: Apple (AAPL)
Apple released a stellar December quarterly report, there’s no way two ways about it. With the exception of the iPad, all the products and the Services business turned in strong performances. That strength was evident across geographies. The Greater China region, comprising mainland China, Hong Kong, Macau and Taiwan, saw 20.8% year-over-year and 77% quarter-over-quarter revenue growth.
Apple sold 21.5 million units of iPhones in mainland China alone in the fourth quarter, market researcher Canalys said in a report. This helped Cupertino to take the pole position in China for the first time since the first quarter of 2015. Canalys analyst Sanyam Chaurasia said:
“Apple saw unprecedented iPhone performance in Mainland China, with aggressive pricing for its flagship devices keeping the value proposition strong.”
Mac, along with wearables, home and accessories, were also at record levels, Apple’s chief financial officer Luca Maestri said on the earnings call.
More importantly, chief executive officer Tim Cook suggested that supply chain constraints will be less of a headwind in the March quarter than in the preceding one.
Looking forward, Apple is staring at a catalyst-rich period. Rumors suggest the company will have multiple launch events, with the first one coming as early as March 8. A low-end iPhone, the iPhone 14, upgraded iPad, AirPods and new pro Macs are all in the pipeline, according to Bloomberg columnist Mark Gurman.
Apple shares are trading at a forward price/earnings multiple of 28.8. This is in line with the broader tech industry valuation.
Out of 27 analysts covering Apple shares, 22 have buy ratings and five remain on the sidelines, according to TipRanks. The average analysts’ price target is $192.42, suggesting over 10% upside from current levels.
Advanced Micro Devices (AMD)
AMD shares are down about 18% in the YTD period. The chipmaker’s fourth-quarter earnings steamrolled past estimates, thanks to strong data center revenues as well as server and gaming processor sales.
Daiwa Securities analyst Louis Miscioscia lauded AMD’s growth with cloud customers that propelled the enterprise, embedded and semi-custom segment’s revenue up by about 75% YOY
The near-term outlook is positive. AMD CEO Lisa Su said in a statement:
“We expect another year of significant growth in 2022 as we ramp our current portfolio and launch our next generation of PC, gaming and data center products.”
Specifically, the company expects 2022 growth to be led by server processors.
An interesting take on AMD’s growth prospect was offered by BofA Securities analyst Vivek Arya. AMD boasts only 15% of the overall PC/server processor market despite stellar growth. The remaining 85% of the total addressable market of $70 billion is up for grabs for the company, the analyst said.
Out of the 23 analysts issuing ratings for AMD, 14 have buy ratings and the remaining nine have hold ratings, according to TipRanks. The average analysts’ price target is $156.95, suggesting 30% upside from current levels.
Tech Stocks: Amazon (AMZN)
Amazon is the 800-pound gorilla of the ecommerce space, and has also built up a strong cloud business. Amazon Web Services, the company’s cloud computing business, is the leader in the space, commanding 33% of the overall Cloud infrastructure services market in the fourth quarter, according to market research firm Canalys.
To put things in perspective, Amazon’s market share is more than the combined share of the second- and third-ranked Microsoft Azure and Google Cloud, respectively. The latter two together commanded a 31% share in the fourth quarter.
E-commerce, the company’s bread and butter business, accounted for about 87% of its overall revenues. However, the business bled at the operating level and reported an operating loss of $1.83 billion. The saving grace was the AWS business, which raked in an operating profit of $5.293 billion.
Amazon broke down the advertising revenues for the first time in the fourth quarter. It said ad revenues climbed 33% to $9.7 billion. Amazon’s decision to raise prices for its Prime subscription by $20 a year is seen as reflecting its confidence in the stickiness of its ecosystem.
That said, there is no denying of the fact that growth at the core e-commerce business is slowing. As social media apps such as TikTok, Meta’s flagship Facebook and Instagram all venture into e-commerce, the pressure is on traditional e-commerce companies. They face the predicament of having to share the ad dollars with the social media companies.
Amazon is poised to continue its outperformance as long as its growth engines, including the AWS, can mitigate the stagnation seen in its e-commerce business.
Amazon shares are down about 5% in the YTD period.
Sell-side is unanimously bullish on the stock. All the 32 analysts rating Amazon shares are bullish and have buy ratings. The average analysts’ price target is $4,192.97, implying over 30% upside from current levels.
Alphabet (GOOG, GOOGL)
Alphabet stock had a great 2022 by virtue of its 66% gains. YTD, however, the stock is down about 6%.
The company’s fourth-quarter revenues swelled 32% to $75.33 billion. The segmental breakup showed about 92%, or $69.40 billion, coming from Google Services. Ad revenues from the core search business, YouTube and Google Network accounted for about $61.24 billion, up about 33%. Google other revenues, made up of revenues from devices such as Pixel phone, Nest smart home product and Android, came in at $8.16 billion.
Google cloud contributed $5.54 billion to the topline and other bets pitched in with $181 million.
For the first time ever, the company’s annual revenues topped $200 billion in 2021.
The strong quarterly performance came on the back of Alphabet’s “massive and diverse audience reach,” Jefferies analyst Brent Thill said in his post-earnings review note.
Ad revenue outlook for both core search business and YouTube looks promising. Cloud revenue’s supporting act will also be key for the company going forward.
All the 31 analysts rating Alphabet’s stock have “buy” ratings on the stock. The $3,498.71 average analysts’ price target suggest the stock has roughly 28% upside from current levels.
Tech Stocks: Microsoft (MSFT)
Microsoft, the second most valued among global corporations, has emerged as a force to reckon with under CEO Satya Nadella. The company’s fiscal-year 2022 second-quarter results showed 20% YOY revenue growth to $51.7 billion.
Productivity and business processes revenues climbed 19% to $15.9 billion and more personal computing revenues rose 15% to $17.5 billion. But the strongest revenue growth came from the intelligent cloud business, which consists of the Azure public cloud. The segment witnessed 26% revenue growth to $18.3 billion.
Microsoft noted a 32% YOY jump in commercial bookings, thanks to an increase in the number of larger, longer-term Azure contracts. The company’s accent on Cloud came through in the prominence Nadella gave to it in his introductory remarks on the earnings call. The CEO said:
“It’s no longer enough to just adopt technology. Businesses need to build their own technology to compete and grow. Microsoft is powering the shift with the world’s largest and most comprehensive cloud platform.”
Microsoft’s top line will likely grow at a 15% compounded annual growth rate clip through 2026, according to Morgan Stanley analyst Keith Weiss. The software giant’s secular growth trends and operational efficiency position the company on track to hit $20 in earnings per share in five years, he added.
All 29 analysts polled by TipRanks rate Microsoft a “buy.” The shares have over 20% upside potential, based on the average analysts’ price target of $375.22.
Tech Stock Losers: Meta Platforms (FB)
Meta has the dubious distinction of bringing down the tech stocks — and in turn the broader market — with its mixed fourth-quarter earnings report. The battered stock is down over 34% YTD.
The social media giant missed expectations on multiple metrics, including the bottom-line result, monthly and daily average user numbers, and the average revenue per user. More importantly, it appears that the company’s fundamental problems aren’t going anywhere. It issued a weaker-than-expected revenue guidance for the first quarter.
Meta handed out a list of issues that are hurting its business. Chief among these are the impact of Apple’s privacy changes and macroeconomic factors that is forcing advertisers operate on shoestring budgets.
TikTok, the short-video app to which these social media Goliaths gave little credit to initially, is also impacting Facebook’s business. People are gravitating more toward this format, and lower-revenue yielding Instagram Reels is snaring away users from Meta’s more lucrative Feed and Stories. And this is hurting margins.
Is salvation in sight for this mother of social media companies? Meta is facing incremental risks in the near- to medium-term due to its choice to reorient its business toward the metaverse. Metaverse could emerge as the next big thing in the tech realm. But Meta will have to navigate through a host of issues in the emerging arena before it can begin to reap rewards.
The recent pullback in shares that has rendered Meta’s valuation attractive is one definitive positive. The forward P/E of the shares has dropped to a justifiable 17.5, compared to 29 for Twitter (NASDAQ:TWTR) and 95.2 for Snap (NYSE:SNAP).
Meta’s stock is rated a buy by 32 analysts and a hold by 11, while one has pressed the “sell” button, according to TipRanks. The average analysts price target is $332.14, offering scope of about 50% upside from current levels.
Tech Stocks: Netflix (NFLX)
Netflix is down about 33% YTD. The streaming giant is feeling the heat of competition. Fourth-quarter global net subscriber additions slowed from 8.5 million in 2020 to 8.28 million in 2021. The company guided to net adds growth of 2.5 million in the first quarter, slower than the year-ago’s 3.98 million.
The company blamed the softness on the pandemic hangover. Spencer Neumann, Netflix’ CFO said on the recent earnings call:
“It’s probably a bit of just overall COVID overhang that’s still happening after two years of a global pandemic that we’re still unfortunately not fully out of, some macroeconomic strain in some parts of the world, like Latin America in particular.”
Co-CEO Reed Hastings did give credit to competition but said Netflix has prevailed despite Amazon and Hulu breathing down its neck for 14 years.
Needham analyst Laura Martin, however, thinks Netflix can’t succeed with its current business model. For the company to stay ahead of competition, the analyst suggests it introduce an advertising tier and buy an old media library rather than making new content to increase its return-on-invested-capital on content.
The recent price hikes by Netflix are apparently an attempt at absorbing rising content costs. The standard tier now costs $15.50 per month, making Netflix’s offering the most expensive among the leading streaming platforms.
There are quite a few analysts, who stay on the sidelines of Netflix. TipRank’s compilation show that out of the 35 analysts rating the stock, 17 have buy ratings, 15 have hold ratings and three have sell ratings. The average analysts’ price target of $521.21 suggests about 30% upside potential.
Tech Stocks: Intel (INTC)
Intel has fallen way behind its rival AMD in recent years. The chip giant, despite its still-dominant position, is steadily losing share. Intel is partly to be blamed for its dismal showing. Product missteps and execution have been issues with the company for some time now.
Intel put in place a new CEO, who reworked on the company’s strategies and priorities. The company managed to beat expectations in the fourth quarter but the outperformance was against an easier comparison.
Intel has a few things going for it currently. The company’s Alder Lake processors have been found to be more efficient than AMD’s competing Ryzen offering. Intel has also opted to take on AMD with aggressive pricing. It remains to be seen if Intel can keep the pressure on AMD and prevent it from chipping away at its share.
Intel’s shares have shed 7% thus far this year. The stock has six buy ratings, nine hold ratings and five sell ratings from 20 analysts who have rated it. The average analysts’ price target is $55.11, implying about 15% upside from current levels.
On the date of publication, Shanthi Rexaline did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Shanthi is a contributor to InvestorPlace.com as well as a staff writer with Benzinga. Equipped with a Bachelor’s degree in Agriculture and an MBA with specialization in finance and marketing, she has about two decades of experience in financial reporting and analysis, and specializes in the biopharma and EV sectors.
