Technology, the largest sector in the US, currently represents 19.8% of the market. 12 sub-sector groups make up this segment, including: software, communications equipment, data processing, internet services and semiconductors. There are notable performance differentials between these sub-sector groups. The top 5 dominant companies make up 52% of the total by market capitalization. A combined $40Bln worth of shares a day change hands in Apple, Microsoft, NVIDIA, Meta (Facebook) and Alphabet.
Valuations for technology companies are often high compared to the broader market as investors assume high levels of growth will persist for this select group of companies.
This quarter, however, the earnings for Apple, Amazon, Alphabet and Microsoft were all a little shy of expectations.
- Apple’s revenue slipped 5% due to “a challenging environment”.
- Alphabet missed on YouTube advertising revenue also quoting competition within the sector.
- Microsoft’s cloud revenue growth was lower than expectations.
- Amazon posted its slowest ever growth rate.
Investors are left asking if it is still appropriate to pay lofty valuations for these businesses? Either earnings need to accelerate quickly or share prices need to adjust, bringing valuations back to a more sustainable level.
Today, more than ever, navigating this sector successfully means broadening horizons well beyond the mega caps to search out companies that are prospering in the post COVID world. There are many companies, including the mega caps mentioned above, that significantly gained from pandemic lockdowns while we were working from home, steaming media and shopping from our armchairs. Times have now changed, and many companies who prospered during the pandemic are now finding it increasingly tough to further increase earnings above levels seen in those captive days when we had nowhere else to go.
Fig.1 Source Bloomberg LLP
Earnings releases are the key to highlighting potential future winners. A few examples we believe fall into this bracket include:
- IT outsourcer CGI Inc, posting double digit growth but still showing a valuation of 17 times next year’s earnings.
- Transaction processer Visa exceeded earnings estimates stating that the resurgence of global travel helped earnings rise 12% from a year ago.
- Looking to Europe, ASML, Europe’s manufacturer of equipment for the semiconductor industry commented that order backlogs remain strong and guided growth higher for 2023.
- From Spain, Amadeus supplies software to the travel and leisure industry. The resurgence of travel this year has rejuvenated investor interest where recovery is finally upon us, after difficult times for the entire industry during the past 3 years.
These are a few examples of companies that have issued attractive recent earnings and which we currently own in the Global Equity Fund (Fig.1 above, with a comparison to the Vanguard Tech ETF.). The technology sector, at 20% of the market, is a vital source of ideas and includes many exciting companies. To see the latest MDD for the Martello Global Equity Fund please click here Martello Global Equity Fund MDD
During 2023, investors will perhaps identify a broader group of companies that will prosper in the future, rather than looking back to those that have prospered in the past. Markets are ever forward looking but investors have a tendency to look to the past for tomorrow’s ideas.
There is an extensive list of technology companies in many industries pushing the boundaries and prospering as we move into 2023. Sometimes, as investors, we focus on just a handful that are the mega cap premier league. Perhaps this year will be the year when others get the call up and will gain recognition for just how good they really are.
