Tech stocks: can they keep up the momentum after share price surge?
US tech stocks have rebounded from the sharp sell-off in the latter half of 2018, but can the likes of Microsoft, Apple, Alphabet and others keep up the momentum?
US tech stocks have bounced back from the sell-off seen late last year as share prices continue to head higher. Many in the sector gradually gave back the gains they had made in the first half of 2018 as shares bottomed out toward the end of the year. The possibility of higher interest rates, a slowdown in the global economy, the US-China trade war and a sales slump in key hardware markets all played their part in sending shares in the likes of Apple, Alphabet, Intel and NVIDIA lower in the second half of 2018.
While many of these problems remain on the horizon, it is clear confidence has improved among investors who have driven a surge in big tech stocks since the start of 2019.
US tech stocks rebound as share prices surge in 2019
|Share price movement %||H1 18||H2 18||2018||January||February||March||YTD|
|Advanced Micro Devices||45.8%||18.9%||73.4%||29.6%||-3.6%||9.2%||36.4%|
Although it was a weak end to 2018 for the equity markets in general, larger tech stocks mostly proved more resilient by booking smaller declines while the likes of Microsoft and Advanced Micro Devices (AMD) booked against-the-grain gains.
However, it is evident that the rally this year is slowing. The tech-heavy Nasdaq Composite has booked solid growth of 1.5% in March but that is a marked slowdown from the two previous months – and that pattern is reflected in the individual share prices of the stocks in the table.
Race for most valuable company tightens amongst tech stocks
Apple became the first publicly-listed company to boast a valuation of over $1 trillion last year and was soon followed by Amazon, but valuations have fallen back since then. The race for the top spot is much tighter today: Microsoft is currently the most valuable company with a value of $897 billion with Apple just behind at $890 billion, followed by Amazon at $871 billion.
The fact valuations are now far from their previous $1 trillion-plus highs also suggests investors grappled with the concept they had reached ‘peak tech’ last year, at least when it comes to the biggest players.
Microsoft: returning to the top after over a decade
After briefly becoming the most valuable firm late last year for the first time since 1998 – and becoming the first firm to unseat Apple for seven years – Microsoft’s efforts to move beyond its core Windows and PC business is paying off.
Having gradually seen its share price overtaken by its rivals, Microsoft was slowly becoming known as ‘old tech’, but it has leveraged its expertise to reinvent itself with huge success.
Indeed, its latest set of quarterly results were testament to that. Revenue from its core Windows business slipped 5% but was comfortably offset by strong growth from its cloud-computing business Azure, its Office 365 suite, Surface devices, its gaming arm including Xbox, and its professional and recruitment social media platform LinkedIn. The decline in Windows sales was put down to a shortage in low-end processors available from Intel, which has been putting more effort into higher-end processors of late. Microsoft has said this problem will continue into the current quarter to the end of March 2019, but it should start to unravel thereafter with Intel reportedly trying to resolve the supply problem before the end of June.
The momentum behind Microsoft looks set to continue, too. The company has said full-year (FY) revenue for the year to the end of June 2019 should rise by about 8%, mainly down to Azure and gaming, and said expenditure should drop to help improve its operating margin at a time when some expected it to tighten.
Apple: from smartphones to services
Apple was particularly hit by the sell-off last year as wider market concerns were exacerbated by the slowdown in iPhone sales. But the company seems to have already reassured investors that it can turn its 900 million iPhone users (1.4 billion when you include other Apple devices) into a new revenue stream that relies on flogging services and subscriptions, not hardware as it has traditionally done. Apple shares, having slumped nearly 8% last year, have surged by over 18% in the first three months of 2019.
Its push from hardware to services culminated in a recent event used to unveil new services, with focus predominantly on its new video streaming aggregation service and the new Apple credit card that is backed by Goldman Sachs.
It has also demonstrated the power of its reach, helping further cement the belief Apple can reinvent itself. Music streaming service Spotify has recently filed papers alleging Apple is unfairly using its dominance in smartphones to dominate online services and apps, claiming the 30% fee Apple charges is wrong. But, with Apple’s future now relying on these types of services including Spotify’s biggest rival, Apple Music, the company has shown it is willing to leverage its strengths to get ahead of the game. In response, Apple has boldly said that 'Spotify wouldn’t be the business they are today without the App Store ecosystem', adding: 'Let’s be clear about what that means. Apple connects Spotify to our users. We provide the platform by which users download and update their app. We share critical software development tools to support Spotify’s app building. And we built a secure payment system — no small undertaking — which allows users to have faith in in-app transactions. Spotify is asking to keep all those benefits while also retaining 100 per cent of the revenue.'
Alphabet: can Google keep a cap on costs?
Momentum behind Alphabet shares eased earlier this year when it posted a huge jump in spending in 2018 – with capital expenditure soaring to over $25 billion from $13 billion the year before. However, after taking in the large lifts to spending by rivals Facebook and Amazon and the company’s promise that spending will 'slow meaningfully' in 2019, shares have picked up once again.
Alphabet – which competes for advertising dollars and cloud-computing business – has been stepping up its investment in licensing original content to try to bolster its premium subscription service for YouTube and to expand its cloud-computing capabilities.
Now, investors are hoping a twofold return – lower expenditure and rewards from last year’s heavy investment – will drive the company forward in 2019. The announcement that it will launch a new video gaming streaming service named Stadia later this year has also raised expectations.
It plans to leverage YouTube (where people now prefer to watch other people play video games rather than play themselves) to create an easy access point whereby viewers will be able to stream new games with ease. Details are still thin on the ground, though. The model and pricing are still unclear, such as whether it will be a subscription service or charge per game, and questions remain over the quality of content it can secure and whether it can truly entice gamers away from core consoles on offer by Microsoft and Sony.
Intel: new chief executive needs to hone focus
Intel has been spending big to diversify beyond its main business selling processors for PCs (hence the shortage that hit Microsoft) and has invested in areas like memory chips, graphic processing units (GPUs) and modems. For example, research & development (R&D) spending was equal to 40% of revenue last year compared to just 27% in 2010. It has also splashed out on major acquisitions.
But the company’s new chief executive that took over in early February, Bob Swan, has said he will sharpen Intel’s focus and rein in spending. Intel has already exited the wearable tech sector but is yet to reveal what else could be up for the chop.
The task at hand is deciding what avenues to pursue and which ones to avoid. Intel’s main bet is on 5G technology fuelling demand for its chips as more wireless devices enter the market and acting as a middleman in the cloud-computing space by helping business link several cloud-computing services under one system.
NVIDIA: promises of recovery revives share price
Chipmaker NVIDIA had a solid start to 2018 after posting solid growth over the first three quarters of the year, but suffered a sharp 24% drop in revenue in the final three months (to the end of January 2019) that spooked investors. Demonstrating the strength of its performance in the rest of the year, annual revenue still came in 21% higher year-on-year.
The reversal in fortunes was down to a slowdown in demand for its chips in the gaming market, particularly in China, as well as the huge drop-off in demand for chips that were being used in cryptocurrency mining rigs after price pressure made many uneconomical.
However, investors have taken heed from the company’s forecast that it could turn things around before the end of its current financial year and welcomed the announcement it has agreed to acquire rival Mellanox Technologies for $6.9 billion (including debt) – reportedly out-bidding Intel. Investors will see the purchase as a win over Intel and a shift in direction for NVIDIA, with Mellanox set to move the firm away from gaming. Mellanox makes equipment to transfer data between servers and so on, and NVIDIA is hoping it will compliment its GPU business which is increasingly popular in advanced technologies such as machine learning systems.
With NVIDIA revealing the combined entity will be a key provider for the top four biggest cloud-computing providers there is good reason for investors to feel confident.
Advanced Micro Devices: where is the ceiling?
AMD was one of the best-performing stocks on the S&P 500 last year and defied the wider sell-off, and shares have continued to gain traction in 2019. It has won applause for beating rival Intel with its latest chip designs and for posting results outperforming NVIDIA, and its latest results showed record revenue from selling GPUs to datacentres.
NVIDIA’s net revenue jumped from $5.3 billion to $6.5 billion in 2018 and the company managed to swing to a $337 million net profit from a $33 million loss the year before.
On the downside, some have paid attention to recent disclosures that long-term shareholder Mubadala Investment Co – the Abu Dhabi sovereign investment fund – has sold down its stake in AMD for over $800 million (although it did also convert warrants into new shares worth nearly $450 million), building on a sell-down last year for over $400 million. With shares having gained so much value over the last 15 months, some will also take caution from the slowdown in share price growth, having fallen in value in February and risen 9% in March compared to the near-30% lift reported in January.
Where next for tech stocks?
There is huge change happening among the tech industry and investors are grappling with peak valuations at a time when most companies are having to invest heavily in the next big thing to ensure they are not left behind. Whether it be Apple launching new digital services, Alphabet making a big push into gaming, or NVIDIA’s diversification through Mellanox, it is clear no one is safe from the fast-moving world of technological development and the need to stay relevant.
Many of the problems that weighed on share prices in the latter half of 2018 still remain today. The economic picture is not faring any better, higher interest rates remain on the table and the US-China trade war continues to rumble on. However, revelations of new expansion/diversification plans and the latest earnings season seems to have reinstalled confidence among investors this year. The question now is how long that confidence will last, particularly as there is already an evident slowdown in share price growth across the sector.
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