The tech-rich Nasdaq Composite plunges 33% in 2022, emerging from its worst year since 2008. After the tech industry’s booming days early in the pandemic, inflation has picked up its head for the first time since the pre-global financial crisis and the Federal Reserve has raised interest rates. The rate is the fastest pace in decades.
While some might expect a big rally from the most beaten tech stocks (the biggest losers), a lot of uncertainty remains. There could be a recession. If one is avoided, interest rates could stay high for longer.That’s why technology conglomerates Amazon (AMZN 3.56%), alphabet (GOOG 1.60%) (Google 1.32%)When microsoft (MSFT 1.18%)Having fallen between 28% and 50% in 2022, it could be growth investors’ best bet for tech’s recovery in 2023.
Proven Profitability
Inflation may fall and interest rates may fall, but interest rates may continue to rise for some time. If interest rates fall, it could mean the Fed has been pushed into recession. A “soft landing” in which inflation and interest rates moderate without a recession is still possible, but investors may be in “risk-off” mode until a solution is reached. Also, in the optimistic scenario that a recession is avoided, interest rates are likely to remain higher than during his 2008 global financial crisis and his COVID-19 pandemic.
That means investors may demand higher returns from stocks than they have in the last 15 years. While many growth tech stocks that have made big gains over the past few years have never actually made a profit, Amazon, Microsoft and Alphabet have each made big gains in their core businesses. Much of the recent compression in margins can be attributed to the macroeconomic environment and not to competitive position.
So, if the economy is strong and interest rates remain high, these three tech giants will outperform the underperforming growth stocks that need ultra-low interest rates to finance their growth and earn high valuations. It might work.
Amazon down 50%: 3 major headwinds could reverse
There’s a line of thought that Amazon isn’t making much money, but it’s very likely by choice. Amazon typically tries to operate near breakeven each year, reinvesting profits from its core business into growth ventures.
The company’s Amazon Web Services operating margins are typically in the 20% to 30% range. Meanwhile, Amazon’s digital advertising business and third-party e-commerce revenue can be equally profitable. And if you remember the tech bubble that burst in the early 2000s, the last time Amazon went into cost-cutting mode was when it was a first-party retailer, by 2004 operating margins were reached 6.4% of him.
Before and during the pandemic, Amazon’s overall profits were starting to pick up. However, the company spent a lot of money building its infrastructure during the pandemic. In his first nine months of 2022, he faced two other headwinds. Soaring fuel prices have increased e-commerce delivery costs and cloud data center operating costs. Also, a sharp appreciation of the dollar has reduced foreign sales. currency.
But all these headwinds are showing signs of reversal. CEO Andy Jassy is streamlining Amazon’s logistics footprint and reducing non-core projects. And recently, he announced plans to lay off more than 18,000 people, undoing some of the overhiring that took place over the past two years.
Additionally, oil and gas prices have fallen significantly over the past few months, as has the US dollar index.
With the headwinds to profits reversing and e-commerce versus cloud sales being easier to compare in 2023 than they were in 2022, Amazon’s earnings could be surprisingly upside throughout the year. Perhaps that’s why Amazon was actually chosen as one of them. Barons Top 10 picks for 2023.
Alphabet: Cheap Stocks Rich in Cash
With a dominant Google search engine and a myriad of side ventures centered around big data and artificial intelligence technology, you wouldn’t expect a company like Alphabet to be worth just a market-average valuation.
Alphabet is plagued by concerns about the digital advertising market in case the economy hits a recession. But the company also has more than $100 billion in net cash on its balance sheet and is trading at the lowest valuation of these three stocks after the 2022 downdraft, with a profit of just 17x.
Additionally, these earnings were weighed down by losses in Alphabet’s cloud division and losses in its ‘other betting’ segment. This makes it even cheaper for major advertising businesses on Google Search, YouTube, ad networks and Android.
On the other hand, it’s hard to see Alphabet’s high-growth cloud division without value. “Other bets” may be questionable, but their value is probably not negative. Additionally, Alphabet may reduce these costs if appropriate.
Fuel and infrastructure costs are less of an issue for Alphabet, but they may have been more impacted by a stronger dollar as the currency provided a 5 percentage point headwind to growth last quarter.
The strong dollar recently reversed, putting the advertising industry into a down cycle, but eventually another up cycle. Meanwhile, Alphabet still dominates search and YouTube. Google Cloud isn’t yet profitable, but it actually outperformed other cloud platforms last quarter. Given that AWS has a margin of around 30%, it’s very likely that Google Cloud will eventually make a profit as it scales further.
OpenAI’s recent announcement of its ChatGPT chatbot engine has highlighted one potential risk. However, ChatGPT just opened to the public on his November 30th, and its computing costs are so high that it doesn’t seem like a challenge in the short term.
Even if ChatGPT ultimately poses a threat to Alphabet, it’s just another reason to own Microsoft. Microsoft is investing in a new chatbot and may use it in some products.
Microsoft: Very defensive with undervalued growth
Even Microsoft, perhaps the most diversified and defensive of the three, is down nearly 29% in 2022. A company like Microsoft with a higher bond rating than the U.S. government rarely loses that much, and its current share price is attractive.
Like Alphabet, Microsoft was hit by a stronger dollar in the third quarter. And now concerns over the growth of cloud software are coming to the fore.
Still, Microsoft is the most profitable thanks to a variety of large and growing monopoly or oligopoly businesses such as Windows, Office, Dynamics, Azure, LinkedIn, and Xbox. Under CEO Satya Nadella, Microsoft’s already high operating margin has expanded by about 15 percentage points over the past decade to nearly 43% today.
MSFT EBIT margin (TTM) data by YCharts. EBIT = Earnings before interest and taxes.
The beauty of Microsoft is that despite the company’s massive scale already, it doesn’t rest on its laurels. Recent Plans to Incorporate ChatGPT into Bing Search Engine and Attempted Acquisition activision blizzard It shows that Microsoft isn’t shying away from bold attempts to grow even bigger, despite the regulatory risks.
Growing businesses in cloud and artificial intelligence (AI) will have to weather the recession. Image Source: Getty Images.
All three companies will be the best growing businesses in the 2020s
A common link between Amazon, Alphabet, and Microsoft is that they are part of an oligopoly of cloud infrastructure. Cloud growth slowed at the end of last year, but the economic downturn could accelerate companies’ move to the cloud in the long run as it saves them money to build their own data centers. I have.
Companies migrating workloads to the cloud are like buildings migrating from onsite generators to grid connections. And this virtual “grid” enables cutting-edge innovation that would otherwise not be possible, with all three companies developing artificial intelligence applications that will further grow their businesses.
While some analysts recently predicted cloud growth would slow next year, the research firm said Gartner The October report forecast that cloud infrastructure growth will accelerate from 27.3% this year to 29.8% next year. Allied Market Research believes that in the long term, the cloud infrastructure market will grow at a CAGR of 25.3% between 2021 and 2030. TRUE 10 years of high growth rate.
Even if the current slowdown continues, it looks like a short-term cyclical problem. In the long term, the cloud infrastructure as a service (IaaS) sector looks like a large market in which only these three players can meaningfully compete.
Amazon, Alphabet, and Microsoft share high historical and underlying profitability, 2023 profit growth opportunities, and exposure to the cloud IaaS market. These three stocks may not only be the most defensive tech stocks in 2023, but also the most likely to rebound.
