Economic Insights Newsletter

Technology Corner: What the recent financial results tell us about the overall health of the technology sector?

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Take a hard look at the different groups within the tech space, we can make some more informed judgements of its true health.

Semiconductors Chipmakers have signaled that there is slowing demand for smartphones and PCs around the world as consumers grapple with recession fears and a 40-year high inflation. In contrast, chip companies that cater to automakers, data centers and industrial firms are still trying to keep up with demand. These results are playing out in the semiconductor sector as the “haves” are being separated from the “have nots.”

Apple is reported to be telling assemblers to make 90 million of its newest iPhones on par with last year. While Apple’s soft 3Q growth in unit volumes for iPhone (+3%), iPads (-2%), Macs (-10%) and wearables (-8%) suggest that the consumer electronics industry is headed for a period of slow or no growth. While Apple suppliers SK Hynix Inc. and Qualcomm Inc. announced underwhelming outlooks tied to a dip in demand for consumer electronics and smart phones.

Sales of both memory and PC chips got boosts during the pandemic as demand surged for mobile phones, computers, and other work-from-home electronics. The catalysts driving those products is now fading as workers return to the office and students to the classroom. Micron Technology Inc., the top maker of NAND/DRAM memory chips that are used in electronic devices ranging from TVs, smart phones to PCs, issued 4Q sales guidance that was below estimates. Citing macroeconomic factors and supply constraints that have broadened customer inventory adjustments.

Global PC makers HP Inc. and Dell Technologies are grappling with the potential for a global recession and supply snags, have seen inventories moving higher. Intel Corp., the biggest maker of personal computer and server processors, posted disappointing 2Q results that included a 23% quarter over quarter (QoQ) drop in Datacenter and 18% QoQ drop in Personal Computing sales. Further, Intel slashed sales and profit forecasts for the rest of the year. AMD, top player in PC chips, shares fell after saying a slump in the personal-computer business is expected to slow future revenue growth. Despite the weakness in AMD’s PC business the data server unit that makes chips for IaaS cloud centers is booming, posting 2Q revenues of $1.5 billion, + 83% YoY. This strength in cloud centers drove total revenue growth for AMD in the 2Q22 of 70%, which is the eight straight quarter of record growth.

A string of companies have reported in line results but with divergent trends in their individual business segments. Infineon Technologies AG increased its revenue forecast thanks to auto industry demand. Texas Instruments Inc. and NXP Semiconductors NV issued bullish forecasts on strong demand for industrial, cloud datacenters, service providers, broadband and auto products. Despite weakness in consumer segments like PCs, Mobile and Communications Infrastructure. Top gaming/datacenter chip maker Nvidia, pre-announced its 2Q results citing a fall in demand for gaming chips that will drop the unit’s revenues by 33.3% YoY to $2.04 billion. This warning came despite consistent growth in its datacenter unit that is expected to post revenues of $3.810 billion, +61.0% YoY.

With all these contradictory signals should investors take advantage of the recent sell-off, S&P Information & Technology Index is down 24% this year, or is there more market weakness to come? With the Fed signaling that they will keep raising rates as long as inflation stays elevated (the Fed has signaled a 50 to 75 basis point increase is on the table for the upcoming September meeting), even if it means increasing UE. This creates fears this Fed policy will eventually lead to slower economic growth, squeezing IT budgets and resulting in lower profits for the Technology sector. Key sectors in the Tech space, such as Social Media/Internet, Smart phones and PCs, are exhibiting a dramatic slowdown. While in contrast, the datacenter and enterprise segments have remained buoyant. With market technicals now favoring the bears, there seems to be a flight to value within the Technology sector, as lower multiple, more mature growth names are out-performing their once high multiple, fast-growth brethren.

Written by Daniel Morgan, Senior Portfolio Manager

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