On Wall Street, Big Tech has been swept away by the stock market storm

Posted on Oct 31, 2022 6:42 AMUpdated on Oct 31, 2022 at 6:43 am

The stock market week that just ended felt like a warning for “Big Tech”. There is no longer any question of preferential treatment for the stars of Wall Street. With rising rates, the situation has changed and the time for indulgence is over.

The brutality of the reactions to the publication of the quarterly results of the powerful Gafam (Google-Alphabet, Facebook-Meta, Amazon, Microsoft and Apple) testifies to this. Alphabet fell 9% on Wednesday and Microsoft 7.7%. Meta, whose strategy once again cast serious doubt on investors, fell 24% the next day. Amazon lost 7% on Friday. Only Apple survived, after punishments of rare violence. The company’s apple results were greeted with a gain of 7.5% on Friday.

So certainly, this positive note, combined with the drop in rates in the bond market, allowed the market to breathe. The Nasdaq, the index with a strong technological coloring on Wall Street, reached 2.87% during the session, which even enabled it to end the week in the green (+2.2%).

The wind has turned

But the tide really turned. And the deflation of the tech bubble, which began by affecting smaller or less profitable stocks, is also affecting the valuations of Wall Street behemoths. 2022 is not 2000, however. We remember a small online bookstore, Amazon, which then lost more than 90% of its value, and Apple which was dissolved by more than 80%.

Today, Apple, Microsoft, Google and Amazon remain stalwarts in the market. They are the only global companies with Saudi Aramco to exceed 1,000 billion dollars in capitalization. Even after this year’s spectacular fall: The stock prices of Google and Microsoft fell by about 35% and Amazon lost 50%. Apple, with a fall limited to 15% compared to its last record, even maintained a status of “safe haven” for investors. The Nasdaq as a whole is down 32% year-to-date.

Only Meta really took off. Facebook’s parent company, once one of the top five US capitalizations, now ranks 21ste listed company across the Atlantic. The size of the stock market correction is proportional to the level of investor concern.

More free passes

As David Older explains in Carmignac, Big Tech no longer benefits from privileges. “In an economic downturn, investors want to see these companies tackle the issue of protecting margins and spending discipline, and they often fail. Analysts, for example, expect Alphabet to take 6,000 people in the third quarter alone, but the group eventually hired more than 12,000 people.

Like all other listed companies, the Internet giants must now convince the markets of their serious budget and their ability to adapt to a less energetic environment. “Investors are wondering if some of these companies have become too large to show enough flexibility to protect their margins during the recession”, continued the manager.

Values ​​evolve

“This is the law of large numbers,” agrees Jacques-Aurélien Marcireau of Edmond de Rothschild AM. “Google accounts for about 50% of online advertising, which itself represents about half of global advertising budgets,” he recalls. “However, when growth slows down, optional spending is cut first, especially advertising. It would be an illusion to believe that Google will be saved in such a context. »

Has the market been cleared? According to one of the measures favored by analysts, the PER, or the next year’s expected earnings relative to the share price, Google has not been very affordable since 2012 at about 15 times the expected income in 2023 while its price is at its lowest. from January 2021 only. Similarly, Microsoft’s PER returned to its 2017 level of 22, after exceeding 35 at the end of last year. Its price has just returned to its March 2021 level.

“After more than two years of excess, Big Tech valuations are becoming attractive again,” said Jacques-Aurélien Marcireau. “But that doesn’t mean you have to buy everything together, some companies won’t do it,” he warned.

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