The Good 

Technology stocks have been in a very severe correction since November. Selling accelerated in January. Earnings are piling up and painting a very constructive story. Quarterly earnings from big tech Microsoft, Apple, Tesla, IBM, Google are above expectations. 2022 is shaping to be a very strong year for technology powered by 5G, cloud migration and strategic investment in IT. Consumer demand is showing no sign of slowing down. 

Inflation, rates, hawkish comments from the FED have been blamed for the selling. Interestingly, fixed income markets have remained very quiet. It sounds the main trade to play higher rates has been to short highly valued technology names. Corporate, at times get it wrong on their outlook. This time, there are no discordant voices on the growth outlook. Issues are not on the demand side but on the supply side: ongoing shortage of chips and other components as well as lack of qualified staff. These are to some extend rich people problems and they create a background for higher global demand. 

Semiconductor equipment manufacturers such as ASML or Tokyo Electron are in the innings of a huge capex cycle. TSMC the largest semiconductor manufacturer in the world announced a significant rise in investment for 2022. From an all time high spent in 2021 of $30bn, they are planning to invest between $40bn and $44bn, 80% earmarked for advanced technologies. TSMC announcement has a double implication on the industry. First, it is forcing similar announcements from other advanced semiconductor manufacturers like Intel and Samsung Electronics in order to stay in the race. It also implies huge capex on older legacy technologies that are causing the current shortages in auto chips. 

Bottomline, the growth story for mainstream technology stocks is very much here to stay. The problem if any lies with valuation. It has been solved by the markets over the last few months. Growth long-term investors can look selectively at big technology stocks such as Google. Value investors might be tempted by names such as Intel, IBM, Samsung Electronics or Nokia. Tesla has now a double-digit PE (80X) not a bargain yet but not irrational any more for a company that brilliantly focuses on execution and expects more than 50% topline growth in 2022 on rather conservative assumptions. 

The Bad

The season came with a relatively high number of disappointments. High base effects and growth rate slowdown as things get back to normal hit big market darlings such as Netflix, Paypal, Spotify with a very serious impact on share prices and sentiment. This is a fair reminder that technology can have slow quarters and that it is not immune to macro factors and minor execution and communication mistakes. In these cases, investors should be a bit patient and forgiving and slightly more disciplined on valuation. 

The Ugly

For Facebook, changing its name to Metaverse was not a good sign and not enough to hide the simple truth of an ageing narrative and business model built on a huge but passive number of users. New privacy rules from Apple hurt revenues and confirmed the view that advertising revenues are migrating where users are for example shopping online on Amazon or otherwise using their phones. This could, over time, become a problem for Google. As for the Metaverse, Facebook has little to offer for now other than a new corporate entity. If Metaverse is the future of the internet, and it is a big if, from an investor point of view, the rights keys are to be found in games, blockchain, cryptocurrencies or to make life simpler “tools and shovels” namely Graphic Processing Units (GPU) and to a lesser extend Computing Processing Units (CPU) through Nvdia, AMD on the design side and TSMC on the manufacturing side. Facebook sounds in a very tricky path and is best avoided until they come with a serious new growth narrative. 

To wrap things up, technology is back to normal. The long-term growth story is still very much there. But the Covid accelerator is waning. Valuations are starting to sound attractive. The market has moved its focus away from expectations to execution. Winners with their cash flow and deep management power like Apple, Amazon, Tesla, TSMC or Microsoft are getting a bigger slice of the cake.