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Is Tech’s Time Up?

technology

  • Tech companies are getting pummeled on concerns over rising inflation
  • Not all companies in the tech sector are built equal, high-growth, unprofitable companies ought to be more susceptible to potential rate hikes, while industry stalwarts should continue to prosper

When Henry Ford rolled out his first car, the Ford Quadricycle Runabout in 1896, his neighbors laughed at him because they were convinced that the loud, vibrating heap that belched thick plumes of black smoke would never replace the dignified mode of transport of the time – the horse.

Similarly, investors dismissed the internet before the dotcom bubble and then became disillusioned in its aftermath.

Some are becoming disillusioned again.

With more time spent online during pandemic lockdowns, the assumption is that as vaccines get into arms, people who are out and about again will spend less time locked down to their screens.

Some investors also fear that higher near-term inflation may force central banks to raise policy rates, hitting expensive tech stocks with high growth expectations priced into their valuations.

That thinking stems from the view that higher interest rates would reduce the present value of long-dated cash flows, but such a view doesn’t take into account the new policy framework that the U.S. Federal Reserve rolled out last August.

Under the Fed’s new policy framework, the central bank can let inflation run hot for several periods, to make up for past undershoots.

So if inflation has been low or negative in previous periods, it can shoot above the Fed’s 2% target in subsequent periods, evening out overall inflation.

And that suggests the Fed will be slow to lift rates from zero, and Fed officials have been repeatedly urging investors to look through near-term inflation volatility.

Judging by the minutes of recent Fed meetings, it is possible to surmise that the central bank is more committed to its new policy framework than markets are giving it credit for, meaning that rates will remain lower for longer than general expectations.

And rates aside, let’s not forget that tech firms were doing well even before the pandemic – it’s not as if connecting with friends, watching videos and shopping online were a recent invention.

An examination of the MSCI World Index reveals that the tech sector has had better earnings than any other sector over the past five years, and looking beyond the tip of one’s nose, the long term shift towards digitalization mean that the pandemic has only accelerated these trends.

In the immediate term, a move into so-called “value” stocks that are more sensitive to the economic cycle, may hurt some tech stocks, which were the darlings of the pandemic trade, but that could also provide a shot in the arm for other companies like semiconductor manufacturers, including Intel (+0.95%), Taiwan Semiconductor Manufacturing Co. (-0.53%) and Samsung Electronics (-0.13%).

While geopolitics and supply chain disruptions could roil chipmakers, the high capital cost and handful of players in this industry mean that they still enjoy strong pricing power.

With a global economy eventually back to shopping again, the rise of the internet of things or IoT, will mean that ultimately everything will need a chip (even a toaster!) and that means the demand side of the equation for chipmakers is likely to be durably strong.

To paint tech with a broad brush is too simplistic, especially when approaching tech as if all tech firms are made equal – they are not.

Those tech companies which are likely to be most affected by rates are the highest growth and least profitable companies – the money burners.

But the prospects for the high-quality money churners, your Apple (-0.13%), Google (+0.40%), Microsoft (+0.25%) and Amazon (-0.02%), is altogether different – rates may put a dent in their stock prices, but their values have been proved through time and effective business models.

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SuperCryptoNews is a global leading blockchain and crypto news provider, covering daily news on the latest tech and trading developments in crypto. We bring you expansive crypto news coverage especially in Asia, with a focus on Singapore, Thailand and Southeast Asia.

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