Why the Bounce in Tech is Not the Start of a New Trend

VT Tyndall North American Fund

Why the Bounce in Tech is Not the Start of a New Trend

July was a great month for beaten down Tech stocks. The Nasdaq was +12.35%, the QQQ (Nasdaq 100) was +12.55% and many individual stocks were up 30% or more. So, is this the bottom in Tech?

It seems that many commentators think that, but I take the other side of the argument. There are three main reasons for this. The first reason is corporate earnings. Take Nvidia for example. One of the best loved semi-conductor names, which has a very well-known investment case and is very widely owned. It pre-announced on Monday and delivered its second cut to numbers, with EPS falling from 89c to 51c year over year in Q2. Its revenue also missed estimates, coming in at $6.7bn when the market was expecting $8.1bn. This shortfall was not well received by investors and the stock fell 6.3%, for a total decline in 2022 of 39.7%. Nvidia was not alone amongst its peers, with Micron also disappointing investors the very next day, as they warned of ‘significant sequential declines in revenue and margins’. That stock is down 34% year to date.

The semi-conductor sector is important because it is one of the most cyclical parts of Tech and can be seen as the canary in the coal mine, as it relates to the cycle. Because chips go into everything these days, the sector is also a good barometer of the broader economy. The sector has been selling off since the beginning of the year, having enjoyed a two year upcycle from the lows back in 2020.

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The second reason I don’t believe this is the bottom in Tech is company guidance, which has been weak across the board, and is centred around weak demand and high inventory. Many companies have announced hiring freezes as well as firings, due to bloated cost bases and a dramatic fall off in demand for services. The problem with firing people in the Tech space is that the industry is all about growth and if you’re letting people go due to weak demand it is often a sign that the company is ex-growth. This has a double impact; for those that leave, it’s hard top find another job, for those that stay the culture is impaired. For those that remain, the pot of gold at the end of the rainbow, that is stock based compensation, proves illusory as stock prices plummet.

The final reason is the behaviour of executives. Watching what these guys do is almost always more instructive than what they say, as truth obfuscation is a national sport on earnings calls. The executives always make sure they get paid, and when the icon of the cycle, the poster child for the sector sells a lot of stock, I think that’s notable. So, Elon Musk’s sale of $6.9bn of Tesla stock this week is not a bullish sign.

11th August 2022
Read time : 4  mins

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Data source: Bloomberg
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