Fri. Jan 21st, 2022


Less than four years ago, when Apple’s stock market value hit $ 1 billion, it felt like a highlight for technology stocks. So who would have thought that in the dying days of 2021, the company redefining consumer technology would already be on the verge of surpassing $ 3 billion?

It will go down as a historic period for technology investment. A strong secular growth market, backed by extremely favorable financial conditions, was constrained by a pandemic that forced a rush into digital services.

The profits of 2021 were not evenly distributed. Some corners of the industry (like e-commerce) have cooled to a red-hot 2020, while some tech stars who became prominent early in the pandemic (think Zoom and Peloton) have fallen sharply. But, broadly speaking, the rise of technology, and the exorbitant profits seen by especially the largest companies, continued to support the broader market boom.

Whether it will last until 2022 is another question. The secular trends that have made digital an increasingly important part of the economy are still in place, and regulators have yet to do anything to dispel the most powerful technological platforms. But the immediate winds that sustained the latest technology rally are weakening, and a number of headwinds are making the coming year more uncertain.

Twelve months ago, the five largest technology companies – Apple, Microsoft, Google, Amazon and Facebook (now Meta) – looked ahead to a year in which their total revenue was expected to increase by 13 percent. Something similar is also forecast for 2022. However, things turned out much better in 2021: when the final figures come in next month, the annual revenue growth for the five companies is expected to reach 27 percent. The recovery in digital advertising, the demand for new devices and an increase in spending on cloud and other digital services was much stronger than projected.

This massive outing has extended the Big Tech rally. The group added $ 2.7 billion in market capitalization this year, up 36 percent. This is not in line with the 55 percent pandemic-induced decline last year, but it is still above the 30 percent advance in the S&P 500.

That kind of revenue growth and better stock market performance will be difficult to sustain against more challenging market and financial conditions. Low inflation and the favorable monetary policy that went along with it were a boon for technology. On the one hand, it pumped cash into the market and inflated valuations; on the other hand, it yielded low bond yields that lower the discount rates used to value future profit streams. As rates rise, it inevitably impairs the valuation of growth companies whose best years are far ahead.

The question now is how much of this is already reflected in the market. The prospect of rising rates swept about a quarter of the share prices of high-growth software stocks after the start of November, before a partial decline in the second half of December.

Many parts of the technology industry are also entering a period of slower growth as year-on-year comparisons become more challenging. Last year’s boom in e-commerce boosted online sales in the U.S. by 38 percent in the last quarter. By comparison, growth is likely to only double-digit this year.

At the same time, the probable level of underlying demand becomes more difficult to determine. How much have consumers’ digital habits changed and how much will they go back to old ways of working and playing as the pandemic eases?

Companies that have increased their digital spending seem less likely to go back. But if they advance technology spending that is already planned to get through the crisis, it could mean future spending. After so much continuous upheaval in their work processes during the pandemic, companies may also feel that there is just as much change that their organizations can deal with at once, leading them to delay some of their digital transformation plans.

That said, the underlying secular tendencies seem as strong as ever. The pandemic only underscored the need for transformation to increase business flexibility. Cloud computing is only now beginning to eat into most established IT workloads, while e-commerce still accounts for only about 15 percent of retail spending in the US.

All this leaves a lot of room for long-term growth. But after recent rises and with the immediate outlook appearing less certain, another excellent year for technology stocks is becoming harder to reckon with.

richard.waters@ft.com



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