2023: Tech strikes back

Tech stocks plunged dramatically in 2022. Time for investors to take a closer look.

By Ludovic Chappex

Buy low, sell high. The investor’s ultimate dream. But unlikely to happen in fact, because the market has a way of avoiding the obvious. Even if we cannot obtain perfection, we can try to come close. Sometimes. That is what some of the bolder analysts seem to be trying to do. In early October, they predicted that tech stocks would make a comeback in 2023. "You never buy at the bottom. That’s the number one rule to know," says Timothy Skiendzielewski, investment director at abrdn, with a smile. He also believes that technology stocks will rebound next year. Citigroup is one of the first institutions to have officially positioned itself accordingly, but carefully points out that the coming months will hardly be smooth, and high volatility is likely to prevail. The price to pay, basically.

"The fundamentals are very positive, with the price-earnings ratios of tech companies down to 10-year lows," (ed. note: a low price-earnings ratio, or PER, indicates that shares are cheap) Anthony Ginsberg, managing director of Ginsglobal Index Funds, told us in early November as we began preparing this issue’s feature story. He advised long-term investors to gradually start moving into the market. Otherwise they could miss out on the first 10% or 20% of the imminent rebound. "With inflation above 8% in the United States, things are still tight," he says, "but I think the situation will turn around as we near 7%." A few days later, on 9 November, US inflation figures came out better than expected (7.7%), causing the markets to rebound. The Nasdaq 100, the US technology sector index, stood out in particular, rising by almost 10% on the same day.

Obviously, this encouraging jump does not say anything about where prices will go in the short term. Analysts believe that the economic climate remains uncertain and that we’ll probably have to wait until the end of the first quarter of 2023 to gain some certainty. Corporate earnings are also expected to continue to erode for at least another quarter, and that could perpetuate the negative market sentiment. In reaction to the situation, many big-name companies and business leaders have said in recent weeks that we should definitely expect the next few months to be a rocky. But those warnings are not specific to technology stocks. Some tech companies have had to make massive staff cuts. For example, Meta has laid off 11,000 employees, and Amazon 10,000.

How did we come to this? To understand and measure this decline, we must remember that many tech firms drew tremendous benefit from the pandemic, in a context of accommodating monetary policies. Their shares rose sharply in 2021. Probably too high. The tide began to turn in November last year, when central banks first announced they would hike interest rates. Over the course of 2022, the Nasdaq has fallen nearly 30%, sparing almost no company. The most speculative tech stocks have generally been hit hardest. The Ark Innovation ETF managed by Cathie Wood, which invests in disruptive innovation companies, has fallen 60% this year, and even more than 70% since its peak in February 2021.

The current atmosphere of recession has a majority of analysts saying that central banks will phase out interest rate increases as from next year, inflation is expected to subside: "We think rates will stabilise. It’s not a question of if it will happen, but when," says Brice Prunas, portfolio manager at ODDO BHF AM. "Rate cuts are possible as early as the second half of 2023," says Mario Geniale, chief investment officer at CIC Bank. "The first quarter will remain difficult, but we expect technology stocks to rise over the year because their valuation is currently low, and these firms have stronger reactions to interest rate cuts. These companies also have healthy balance sheets."

Brice Prunas agrees. "The current fall in their share prices has no similarity with the decline during the 2008 crisis, and even less in common with that of the internet bubble in 2000. For now, the factors contributing to the crisis are exogenous. According to our analysis, many technology companies are in a very healthy position. They have cash reserves and a solid business model."


"Cyber security is becoming the number one issue for any business owner"

Timothy Skiendzielewski, investment director at abrdn


Invest, yes. But in which firms? The experts we contacted name two sectors that stand out quite clearly from a medium- to long-term perspective: cloud services and, its flip side, cybersecurity. They easily even refer to megatrends. The selection of companies in this feature reflects this. Studies conducted by consulting firms predict that growth in these areas will be spectacular over the next 5 to 10 years. For just two examples from the average reported figures, Reportlinker expects the cloud market, worth $548.8 billion in 2022, to reach $1,240.9 billion in 2027. That represents average annual growth of close to 18%. Meanwhile, Astute Analytica forecasts that the cybersecurity market will grow from $162.9 billion in 2021 to $346 billion by 2027, i.e., a rate of more than 13%.

"Cloud-based digital transformation will permeate all sectors of the economy," says Timothy Skiendzielewski at abrdn. "This is only the beginning. And in these conditions, IT security is not an option but an absolute necessity." At ODDO BHF, Brice Prunas agrees. "Cyber security is becoming the number one issue for any business owner," he says. Brice Prunas is convinced about the potential of artificial intelligence (AI) in the longer term. The analyst insists that the technology is still in its infancy in terms of its economic benefits, but that it will eventually affect all business sectors. He stresses the importance AI will eventually have in the health sector. "For pharmaceutical companies, for example, AI can bring very significant savings in developing drugs. Another application is in robotic surgery, which will become more commonly used and limit the rate of human error."

In the companies that lead this sector, Brice Prunas cites Nvidia, as it manufactures the computer chips needed for these technologies. He also thinks Google is a definite yes. Tesla is more controversial these days – especially due to the unpredictable behaviour of its boss, Elon Musk – but he also favours it. "AI at Tesla is not just about autonomous cars, it’s at the heart of everything they do. Their humanoid robot Optimus, for example, just keeps getting better. The next version will have conversational functions, and interpreting human emotions will be the next step. In the countless areas of assistance and care, the potential is huge." Google CEO Sundar Pichai will not contradict him, as he actually compared AI to the discovery of fire or electricity in terms of its importance for humanity, in an interview with the BBC last year.

Those are the essential underlying trends. In the more immediate future, many analysts also favour companies active in the electric vehicle market (such as semiconductor manufacturer Infineon, which is included in our selection). According to them, this sector has a lot of room to grow over the next decade. The penetration rate of electric vehicles is still low, at around 5%. But the trend is likely to accelerate, especially as policy is pushing in that direction.