2022 was a tough year for stock investors, especially technology stocks. Share prices of Major US tech companies such as Apple, Microsoft and Google have fallen around 30% to 40%. Tesla, once a darling for get-rich-quick investors, fell 70%. Not to mention a few high-profile collapses of crypto-related companies such as FTX.
- Why did technology stocks fall more than other sectors in 2022?
- Will Technology stocks outperform this year?
- Which areas of technology stocks present potential opportunities?
We will discuss these in this article.
Most retail investors are out of the market now
Through my work as an investment adviser, I have talked to a lot of investors. I cannot help to notice that many retail investors are giving up investing after the rough year of 2022. They are still trapped in the newspaper’s headline narratives of recession, inflation, and rising interest rates, and seeing no light in the tunnel.
In fact, Goldman Sachs research shows that retail investors have net sold all of the S&P 500 stocks they accumulated from 2019 to 2021. This is sad because we all know by now the stock market had a good rally in January, and of course, after retail investors dumped their shares at huge losses.
If you follow my blog, you know I was positively biased about the stock market since the end of last year. This was on the basis of the outlook that the Fed will slow down the rate hike in 2023. Indeed, in the latest announcement on Feb 1st, the Fed will only raise the 0.25% interest rate, only a third of the 0.75% hike each time last year.
Interest rate is the anchor for all asset prices
Before the market crash, I have written an article to explain why rising interest rates affect stock valuation. I’ve said “the interest rate is the anchor for all asset prices”, high costs mean higher discount rates which in turn put pressure on the current stock prices.
I have also warned people about the euphoria in tech stocks and cryptocurrencies. I specially mentioned Tesla stocks and bitcoins at that time.
Growth companies with little or no earnings are most affected by interest rate hikes.
Politics is above all market forces
On the other side of the earth, China tech stocks such as Alibaba and Tencent continued their sliding since the China tech crackdown, losing 50% and only started recovering in Oct.
The collapse of China’s tech stocks was driven by politics. When Alibaba and Tencent started falling in 2020 due to the government crackdown, many people were saying China tech stocks were at “screaming buy” prices. I wrote an article warning people about the risks of getting into Chinese tech stocks back then. My client knew that I have advised them to get out of China tech stocks 2 years ago.
We don’t need a full recovery
If rising interest rates were the reason for the pressure on the share prices of US tech companies, will a reverse of interest rate be a catalyst to trigger a recovery?
If China’s agenda was to “nationalize” the tech companies and squeeze out the foreign capitals, have they achieved their objectives?
In fact, China not only abruptly abandoned the covid-zero policy, but they also eased up on tech giants (after Jack Ma ceded control of Ant Group) and dialled back the stringent “three red lines” that exacerbated a property meltdown.
By now, China technology shares have had a speedy recovery and outperformed US tech shares. Hang Seng Tech Stocks have rallied around 50% since the low in October.
If you believe this round of rate hikes is almost over and China is pivoting their policies, you should be able to feel more optimistic about this sector.
Why nobody is talking about go-to-the-moon and 10x their stocks any more, the market may have been cleansed and ready for a steady recovery.
Of course, there will still be critiques about getting into techs and the volatilities in such sectors will remain high. But I think we don’t need a full recovery and a happily-after-ending for the tech stocks. May a medium-term rebound probably offer us a handful of profits?
Profitability is the key
In 2020 when the financial market was flooded with unlimited capital, any “Tom, Dick, and Harry” can claim to be the future technology of mankind.
But after this round of “quantitative tightening”, capitalists will be more cautious in putting their money. And we finally saw some solid business models emerging.
There is a difference between being a pioneer in a revolution and being a profitable investor. Talking about the newest ideas may look cool, but it doesn’t mean you can make money.
But as someone who wrote computer programs since 10 years old, I feel that the near-term opportunities may be in the Artificial Intelligence (AI) field.
For example, ChatGPT, if you haven’t heard about it, is a simple online artificial intelligence chatbot created by OpenAI in December 2022. You can ask it a question, and it will answer that question. It has gained so much traction recently that it has reached its computing capacity.
Oh, did I mention this is Microsoft’s $10 Billion investment?
My point is not about the geek side of such technologies, but the commercial value. AI has so many use cases in the commercial world to generate real profits, instead of a “greater fool” game in the cryptocurrency arena.
Let me summarize…
Technology stock had a brutal year in 2022. But if you are a rational investor, you know the market always goes by cycles. What goes up will come down and vice versa.
The most important thing is that you need to do your homework and not to sway by the market hype and noises.
When you select technology stocks, start with the 3 basic criteria:
- Revenue growth: Look for companies that have a strong track record of consistent revenue growth. This shows that the company is at least financially healthy and its products and services are in demand.
- Innovation: Look for companies that are leaders in their field and are driving innovation through the development of new and improved products and services.
- Competition: Look for companies with a sustainable competitive advantage, such as proprietary technology or a strong brand. A company that can stand out in a crowded market is more likely to see long-term success.
I will write an article to talk about the opportunities in the Artificial Intelligence field next time. Join my Telegram Channel or subscribe below for the next update.