Will technology stocks go upWill technology stocks go up – The technology sector has led the market for the past decade, and the pandemic has only accelerated that trend. However, the year 2021 put a stop to that trend.
At the close of trading on December 20, the Nasdaq trailed the S&P 500 Index and was roughly in line with the Dow Jones Industrial Average in terms of year-to-date total return.
The Nasdaq will still finish comfortably in the double-digit return range, but that’s undoubtedly down from 45% total return in 2020, more than double its peers.
Beneath the surface, action in the tech sector has been much more volatile, as speculation earlier in the year in SPACs and newly-listed companies gave way to a sell-off of “trade winners.” pandemic” as its future growth looks much more nebulous.
As the year-end period has made clear, we are entering a different environment, of inflation and possible interest rate hikes on the one hand and continued pandemic-related gyrations on the other, including the possibility that (hopefully ) has finally faded into a secondary theme. The immediate and secondary effects on technology, from consumer spending, to supply chain entanglement to continued software adoption, will be hard to avoid but predict.
Here are five gears to watch out for regarding technology in 2022. All figures are as of the December 16 market close.
1. Are semiconductors no longer cyclical?
If in 2020 software players led the sector, 2021 has revolved around semiconductors. Nvidia (NASDAQ: NVDA ) more than doubled, becoming the world’s most valued semiconductor maker, while the iShares Semiconductor ETF (SOXX) rose 36% on the year. The challenges of the supply chain, designed for maximum efficiency rather than redundancy, have led to bottlenecks in the production of phones, cars and just about anything else that uses a chip.
High demand – driven by the increasing electronification of cars, the Internet of Things, artificial intelligence and computing devices and power in general – combined with supply constraints suggest the boom may continue. “Long-term secular trends are driving the semiconductor and silicon wafer manufacturing equipment markets to a structurally higher level,” said Gary Dickerson, CEO of semiconductor equipment supplier Applied Material. Semiconductors have been notoriously cyclical in the past, so the question is whether increased capacity leads to an overbuilding environment or is just enough to keep up with demand; if it’s the latter, semiconductors could continue to rise.
2.Will technology stocks go up Software slowdowns: a new normal?
Zoom (NASDAQ: ZM ) continued to churn and rise this year, but slowing revenue growth heralded a less exciting future, with shares down 41% for the year and 55% from highs. Software companies were among the hardest hit in 2021 as the enormous pandemic-driven growth rates they posted a year ago failed to sustain. This is just the most prominent example, and while there are stocks that have bucked the trend, many of the best performers in the software industry are security-as-a-service (SaaS 1.0) names like Oracle (NYSE: ORCL ) or Teradata.
The year 2022 and the outlook for 2023 should make it clear to investors whether the new standard will imply a reacceleration of growth or if expectations need to be readjusted after the boom times of the first pandemic. The pressure on the sector can only increase in the context of higher interest rates and, perhaps, a renewed focus on profitability.
3.Will technology stocks go up What about the attention economy?
Social media was another sector that suffered in 2021, and several new media peers fell along with it. Pinterest (NYSE: PINS ) and Roku typified the pullback in these two industries with declines of more than 30% for the year and more than 50% from the highs, but it spread more broadly to names like Spotify (NYSE: SPOT ), Twitter (NYSE: TWTR ) and even Snap (NYSE: SNAP ).
At the same time, long-term secular trends — advertising and subscription money moving online — haven’t changed. Moves like the spin-off of Warner Media by AT&T (NYSE: T) to merge with Discovery suggest the importance of scale in the media industry. The Paypal/Pinterest report is one example of the potential consolidation/strategic value in companies capturing consumers’ attention. So the question is where the users’ attention goes and who the investors benefit from.
4.Will technology stocks go up Continuation of the dominance of FAANMG
The market performance depended on the world’s largest companies leading the way. Alphabet (NASDAQ: GOOGL ) and Microsoft (NASDAQ: MSFT ) led the pack, but Apple (NASDAQ: AAPL ), Meta Platforms (also known as Facebook (NASDAQ: FB )), Netflix (NASDAQ: NFLX ) and Amazon (NASDAQ: AMZN) finished in the green this year, with the latter two being the only ones to lag behind the broader indices. They have shrugged off antitrust scrutiny and size issues, and have continued to post impressive profit and revenue growth numbers, generally outperforming their industries. And for all of that, there’s an argument, at least in some cases, that the valuation isn’t crazy, whether it’s Meta’s 24x EV/free cash flow multiple or Alphabet’s 27.5x multiple. As more rates are hit, the FAANMG will be on guard as they flee to safer territory.
5.Will technology stocks go up Reactivation of mergers and acquisitions
A changing and slowing environment could trigger an increase in acquisitions in the technology sector. While 2020 saw Salesforce (NYSE: CRM ) take over Slack and AMD (NASDAQ: AMD ) buy Xilinx, 2021 was slower. Microsoft bought Nuance, and several data centre-related deals took place, but in 2021 tech M&As were more like non-deals: Zoom dropped its bid for Five9, talks between Pinterest and Paypal (NASDAQ: PYPL ) did not come to fruition and, above all, the continued scrutiny of Nvidia’s acquisition of Arm Holdings.
With the news in the last weeks of 2021 of the purchase of Cerner (NASDAQ: CERN ) by Oracle, the starting signal for technology mergers and acquisitions in 2022 may have been given. While antitrust concerns could keep some of the giants buying habits down, slower growth and a still-low interest rate environment could lead to renewed M&A action. This could occur in sectors with abundant competition such as software or media, especially.
