The stock market seems to punish all technology companies regardless of performance. This highlights a range of opportunities for long-term investors.
Many eyes are on this round of tech earnings as markets wait to see if a hawkish Federal Reserve and mixed economic data point to a recession. But the earnings season separates the strong from the weak.
A bifurcation in the technology sector has been apparent for some time. While most growth and tech names are lumped together, not all tech companies are created equal, of course. This quarter, a light shined on those companies positioned to perform well in this highly uncertain and heated macroenvironment.
Tech companies that have delivered the best results have at least one of these characteristics:
They provide products or services with minimal exposure to consumers.
They provide ultra-premium products or components that cater to the wealthiest customers.
Business technology is fascinating
This quarter’s results were even better for companies serving enterprise and business-to-business customers. Cloud revenue at Amazon.com Inc. AMZN,
Microsoft Corp. MSFT,
and Alphabet Inc. GOOGLE,
showed slowing growth rates. Some companies have done well on this trendline.
Here are four:
IBM: Technical earnings were initiated by International Business Machines Corp. IBM,
and the company delivered a stellar quarter that demonstrates strength across its portfolio. Under CEO Arvind Krishna, IBM has narrowed its focus on hybrid cloud and AI, and that strategy is working. After spinning off Kyndryl, the narrower focus, execution and growth from its 2019 Red Hat acquisition is turning heads. It also doesn’t hurt that the stock has a dividend yield of close to 5%.
Today’s Service: In a conversation last week, ServiceNow Inc. NOW,
CEO Bill McDermott said demand for digital transformation is stronger than macroeconomic headwinds. For ServiceNow, this means that workflow, automation, AI and other deflationary technologies will be seen as efficiency creators, as companies seek to get right and refocus. The strong dollar is a challenge for the company, but overall, ServiceNow continues to impress.
Lattice Semiconductors: Right now, semiconductors are a big no-no for many investors, but strength is strength. Lattice Semiconductor Corp. LSCC,
delivered another “beat and raise” quarter, and with less than 6% of its business coming from consumer-related products, it showed there is still demand for companies that can provide specialty chips for the data-center , internet of things (IoT) and automotive customers. Still ramping up its new product lines, the company’s stock is attractive, as it has lagged the rest of the industry, even as its revenue and margins continue to expand.
Honeywell: From clean technology and connected buildings to smart cities and urban air mobility, Honeywell International Inc. HON,
is making massive investments in software, security and analytics. Honeywell sees its building technologies unit as its fastest growing engine. The company says more than 60% of revenue is tied to ESG-related products, so it uses its technology to enable its customers to meet emissions and sustainability goals. (ESG stands for environmental, social and governance, a set of principles.) This quarter, the company beat analysts’ revenue estimates and raised the lower end of its guidance while missing revenue by $50 million on $8.95 billion in sales.
Premium for the win, for now
Another trend that can be extrapolated from this quarter’s tech results is the strength of companies that cater to the ultra-premium consumer.
Apple: I expect the consumer-devices business to take it on the chin for at least another quarter or two. That was underscored by disappointing results from Advanced Micro Devices Inc. AMD,
and Intel Corp. INTC,
But Apple Inc. AAPL,
had its iPhone 14 launch, there was some light on the phones, but it was made up for by a good broad performance highlighted by the Mac delivering a lot. CEO Tim Cook’s comments indicate that, with continued currency and headwinds, the holiday quarter may not be good. But the results showed that if any device company can withstand broad economic headwinds, it’s Apple.
Read: Tim Cook is a great leader for Apple — these numbers prove it
Qualcomm: Qualcomm Inc. QCOM,
did everything right this fiscal year. It delivered record earnings per share (EPS) and revenue, and had another strong quarter, but it’s a chip stock, and chip stocks are in purgatory. That doesn’t mean the company isn’t in a good position. Qualcomm delivered a record handset business, where it owns the premium tier and supplies Apple with critical components for iPhones. The company’s IoT business delivered $7 billion, and its automotive business is seeing rapid growth with a projected pipeline of $30 billion, including $11 billion added last quarter. Today’s glut of supplies could create a short-term slowdown for Qualcomm — the company says it has up to 10 weeks of inventory in the channel. However, the company’s products are designed across a very large portfolio of devices, and the diversification into more business and carrier revenue streams makes the market reaction look more like a hawkish Fed selloff than an indictment on Qualcomm and its CEO, Cristiano Amon.
Daniel Newman is the principal analyst at Futurum Research, which provides or has provided research, analysis, advisory or consulting to ServiceNow, IBM, Nvidia, Meta Platforms, Oracle, MongoDB, Cisco, Juniper and dozens of other technology companies. Neither he nor his company holds any equity positions in the companies mentioned. Follow him on Twitter@danielnewmanUV.