Although chip stocks have sold hard in recent days, some chip companies seem to be better positioned than others to quell the demand weakness that is shaping up in some end-markets.
Also, some enterprise tech companies seem to be well positioned with potential IT budget cuts, while others may be hit hard.
To be clear: I don’t think we’re still heading for a big recession. Not only does the job market look good and the consumer/spending balance in general, we are now seeing inflation cooling in some areas where it is warm (durable consumer products, raw materials, cost of shipping/freight, and to some extent house prices), although energy and food inflation remains very high. And easing some inflationary pressure could well prevent the Fed from taking over too aggressive in rate increases and balance cuts.
But with that said, the negative effects of wealth created by murder seen in both equities and cryptos will certainly affect consumer spending, as well as (including higher mortgage rates) slowing down. housing market. In addition, high energy/food inflation has begun to weigh on the discretionary spending of low-income consumers, and although company spending/hiring is still not bad in general, there are pockets of softness in areas such as brand ad spending and hiring activity with tech companies battling business pressures and/or stock price declines.
In addition, there is now a clear shift in discretionary consumer spending from durable products (notebooks, TVs, furniture, sporting goods, etc.) to travel and hospitality services. And the fact that prices have risen for things like flights, hotel rooms and restaurant meals means that consumers who spend slightly more on services than goods today will have less disposable income to direct eventually.
In short, such an environment suggests cross-currents for tech investors to navigate. The macro environment isn’t as bad as some of the die-hard bears-and certainly, a lot of bad news has already been priced in the shares of many tech companies that face some pressure on demand. However, taking a selective approach towards tech longs – with a bias towards companies operating in markets that are likely to see demand hold well in this environment – arguably makes a lot of sense.
In chip stocks, companies whose sales are leaning to the automotive, industrial and/or cloud data center end-market, such as Analog Devices (ADI), Texas Instruments (TXN) or Marvell Technology (MRVL), can see of higher demand than companies that rely heavily on consumer tech end-markets, such as Qorvo (QRVO), Synaptics (SYNA) or (as the Q2 warning it shared on Monday goes home) Himax Technologies ( HIMX).
Within enterprise tech, cloud software providers such as Salesforce.com (CRM), ServiceNow (NOW) and Workday (WDAY) – many of which now look cheaper than they did a few months ago -may see higher demand than enterprise tech companies whose sales still depend heavily on traditional, on-premise infrastructures, such as Dell (DELL), Hewlett-Packard Enterprise (HPE ) and IBM (IBM). Public cloud giants such as Amazon.com’s AWS (AMZN) and Microsoft’s Azure (MSFT) can also see relatively rising demand.
The shift of the enterprise software industry towards subscription and consumption -based business models associated with license/retention revenue models plays a role here, as well as the long -term change in the businesses that IT spends on software/cloud spending in relation to hardware spending. One only has to look at the following data from Morgan Stanley’s Q1 CIO survey to see how businesses faced with IT budget cuts tend to prioritize software and cloud spending areas (security software especially) in relation to on- premise spending fields such as hardware, consulting and data center construction:
CIO responses on which projects they reduced in spending during the collapse. Source: Morgan Stanley.
As Snap’s (SNAP) Q2 warning highlights, online ad players are also vulnerable to budget cuts right now. This is particularly true for companies highly exposed to e-commerce ad spending (affected by the reopening of activity and the shift to spending on services) and/or brand ad spending (usually one of the first things to be minimized when companies are concerned about their demand environment).
On the other hand, online travel firms such as Booking (BKNG), Expedia (EXPE) and Airbnb (ABNB) seem to be well positioned to benefit from rising travel spending – especially since higher prices is more revenue per booking.
Some of these trends are likely to focus more as the earnings season begins next month. Many, many, tech stocks look oversold right now, and with investor sentiment at very low levels right now, the sector could see a bounce. But some tech companies may have a better shot than others at maintaining any momentum that will build over the next few weeks through July and August.
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