The first quarter of 2023 was anything but uneventful. We have had the second largest bank failure in US history. Meanwhile, inflation surprised many with its rigidity. Along with rising oil prices, this is causing a real headache for central bankers as they struggle to bring inflation down.
Higher rates for longer may be needed to rein in inflation, but at the same time will weigh heavily on economic growth, as will rising oil prices. And it looks like global economic output isn’t getting quite the support some were hoping for. The reopening of China. Although this delicate equation is now much more difficult to solve, there is some hope that interest rate stability is in sight.
Investors in technology companies do not seem discouraged. And year-to-date, the tech-heavy NASDAQ composite has surged, outperforming global stock markets and recouping some, but not all, of its 2022 losses.
The next few weeks promise to deliver key financial statements from most of the big names in the US markets. We have an overview of three technology indicators and share what we are looking for.
Investing in individual companies is not for everyone. This is because it is a higher risk, your investment depends on the fate of this business. If that company goes bankrupt, you risk losing your entire investment. If you can’t afford to lose your investment, investing in just one company might not be right for you. You should ensure that you fully understand the companies in which you are investing and their specific risks. You should also ensure that any shares you hold are part of a diversified portfolio.
This article is not personal advice. If you are unsure whether an investment is right for you, seek advice. The value of investments will rise and fall, so you may get back less than you invest. Past performance is not indicative of the future.
Meta
Metaplatforms was one of the most high-profile victims of the tech sell-off in 2022. Investor sentiment was hurt by a 38% drop in operating profit as revenue stagnated and costs rose 23% .
2022 has seen Meta advertising prices drop sharply while audience engagement has shifted in the right direction. That could help bolster its platforms’ appeal to customers, but further price cuts could be risky given that margins have already been hit hard.
With that in mind, we also want to know if Meta’s plans to cut staffing and office costs start to have an impact when it releases Q1 numbers. The strong rebound in valuation this year suggests that the market appreciates the boost in efficiency. But there is growing pressure to secure a recovery.
Meta is betting big on diversification into new ventures, with ambitious plans to dominate the metaverse that have yet to have a significant effect on revenue. It’s still an area of interest, but Mark Zuckerberg’s focus seems to be heading towards artificial intelligence (AI).
Investors will be keen to see signs of financial return from either forward-looking technology, but it will take time and huge investment. Even after cutting the capital spending budget, the forecast remains above $30 billion this year. Any sign of additional caution in research and development (R&D) will likely be welcomed.
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Microsoft
It’s been hard to escape the hype surrounding recent breakthroughs in AI. Earlier in the year, Microsoft emerged as a keen adopter of these developments, confirming a $10 billion investment in OpenAI, the company behind ChatGPT.
The intelligent chatbot can create human-like content almost instantly with just a few simple text prompts. It has already integrated the technology into its Edge web browser and is rolling out to more of Microsoft’s business apps.
This has not gone unnoticed by investors and Microsoft’s valuation is now back above the long-term average. Given the mixed outlook for third quarter results ahead, we hope to hear more details on how these initiatives will be monetized.
Consensus forecasts see personal computing revenue falling more than 15%, reflecting expectations of continued declines as the PC market returns to pre-pandemic levels.
Microsoft’s main growth engine, the Azure cloud business, grew more than 30% in the second quarter. Forecasts suggest that growth is expected to slow by around 5 percentage points, and given declines elsewhere, we believe there is little tolerance for further slippage.
In short, this year will not deliver the double-digit revenue growth that we are used to. We wouldn’t be surprised to hear more cost-cutting measures after the 10,000-employee reduction proposal announced in January.
Microsoft’s proposed $68.7 billion takeover of gaming rival Activision has removed some key regulatory hurdles. We hope it will be clear if completion by June this year is still relevant. That’s more than Microsoft’s last reported net cash position of $51.4 billion. However, with analysts forecasting $61.3 billion in free cash flow for this fiscal year, chances are the coffers will fill up quickly.
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Alphabet
The recovery in Alphabetthe valuation of over the past six months has been lower than that of the wider sector, and the price/earnings ratio is still below the long-term average. This may reflect broader concerns about ad spending as global recession fears grow.
Microsoft’s integration of generative AI into its Bing search engine also raises the prospect that Google’s dominance may be waning. The launch of its own AI chatbot, Bard, had some well-known teething problems. Alphabet has deep pockets and hopefully the Q1 update will provide details on how it plans to defend Google’s market leadership.
While Google still accounts for over 90% of global search traffic, we still believe Alphabet offers resilience relative to its peers, both in search and other forms of digital advertising like social media.
YouTube’s ad revenue also didn’t hold up, although this was partially offset by subscriber growth. We’ll see if this trend continues.
Google’s cloud business has grown incredibly rapidly, even though it remains heavily loss-making. Clarity on its path to profitability should be welcomed. A recently leaked memo suggests aggressive cost-cutting is being considered across the company, and we’d like to see Alphabet put some numbers on that.
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Unless otherwise stated, estimates are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Past performance is not indicative of the future. Investments go up and down in value, so investors could suffer a loss.
This article is not advice or a recommendation to buy, sell or hold an investment. No opinion is given of the present or future value or price of any investment, and investors should form their own opinion of any proposed investment. This article has not been prepared in accordance with legal requirements intended to promote the independence of investment research and is considered marketing communication. Non-independent research is not subject to FCA rules prohibiting trading prior to research, but HL has controls in place (including trading restrictions, physical and informational barriers) to manage disputes. potential interests presented by such a negotiation. Please see our full non-independent research disclosure for more information.
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