How to analyze tech stocks

Software companies are increasingly adopting a software-as-a-service (SaaS) model, where customers subscribe to a program instead of buying a one-time license, generating recurring revenue for the company. Semiconductor companies design and/or manufacture central processing units, graphics processing units, memory chips, and other chips that help to run devices. Telecom companies providing wireless services, video streaming companies providing easy access to high-quality content, and cloud computing providers powering streaming services are all part of the tech sector.

Some of the most dominant and impressive tech stocks that investors should consider in 2023 include Amazon.com, the leading online retailer and provider of cloud computing infrastructure; Microsoft, a dominant software company known for its Windows PC operating system and Office productivity software; Apple, the maker of iPhone, iPad, and Mac computers, with intense customer loyalty and a growing array of services; Intel, one of the world’s largest semiconductor companies that designs and manufactures central processing units for PCs and servers, as well as specialty chips for artificial intelligence; Netflix, the top player in the video streaming industry, spending billions of dollars each year on content to keep its subscriber base hooked; Meta Platforms, the largest social media company with over 2 billion daily active users across Facebook, Instagram, Messenger, and WhatsApp, envisioning virtual reality as its future; and Alphabet, the parent company of online search giant Google and the popular Android operating system for smartphones.

Tech Stocks, COVID-19, and the Bear Market In March 2020, it was impossible to predict how tech companies would fare during the COVID-19 pandemic, which led to the shutdown of economies and massive job losses. Some tech companies experienced immediate negative impacts, including Alphabet and Meta, which suffered from significant slowdowns in revenue growth as hard-hit industries, such as travel and hospitality, reduced their advertising spending.

On the other hand, other tech companies flourished. Amazon benefited from booming e-commerce sales as consumers avoided physical stores, and Netflix enjoyed a surge in subscribers as people stayed home and had more time to watch TV. Strong demand for PCs, smartphones, and other gadgets boosted sales for Intel, Microsoft, and Apple. A combination of limited consumer spending options and unprecedented stimulus cash helped many tech companies report record revenue and profits.

However, 2022 marked the beginning of the end of the pandemic boom. Sky-high inflation forced the Federal Reserve Board to rapidly increase interest rates, putting pressure on consumer spending. Shortages turned into gluts as supply chains improved and pandemic-level demand subsided. The stock market tumbled, entering bear market territory, with tech stocks among the worst performers.

Amazon significantly increased its e-commerce and cloud computing capacity during 2020 and 2021 to meet the staggering demand. The company overbuilt its e-commerce infrastructure, leading it to close and delay some warehouses in an effort to reduce costs. The cloud computing business also slowed down in 2022, and the company may be facing a similar excess capacity problem there. Record profits during the pandemic quickly faded away, with the company reporting a $3 billion net loss in the first nine months of 2022.

Microsoft benefited from strong PC sales during the pandemic, which experienced a renaissance, with sales volumes rising to the highest levels in a decade and ending a long streak of declines. Working and learning from home, combined with stimulus cash, fueled the boom. However, the boom has now turned into a historic bust. Global PC shipments were down 16% in 2022, with a miserable 29% year-over-year decline in the fourth quarter. Another significant decline is likely in 2023, putting pressure on many of Microsoft’s products tied to the PC.

Intel has been heavily impacted by the declining PC market, losing market share to rival Advanced Micro Devices (AMD) over the past few years. However, Intel made a comeback in 2021 and 2022 with its Alder Lake and Raptor Lake PC CPUs, which were successful despite selling into the worst PC market in years. Unfortunately, this success came as Intel invested billions annually to build out its manufacturing capacity just as the semiconductor market began to decline.

In 2020, Netflix added subscribers at a record pace, but its fortunes changed as competition intensified. Netflix began losing subscribers in North America in 2021 due to a combination of factors, including the pull-forward effect and the emergence of high-quality alternatives such as Disney+, HBO Max, and smaller streaming services. As a result, Netflix is on the defensive, changing its strategy on ad-supported plans and working to reduce costs.

In 2021, Facebook rebranded to Meta Platforms to emphasize its focus on virtual reality and the metaverse, although its main source of revenue still comes from advertising revenue from its social media apps. Sales recovered after the initial pandemic weakness, but a tough economy in 2022 and privacy changes from Apple on iOS devices have presented new challenges. As the advertising business struggles, Meta is investing billions annually in its metaverse efforts, but with almost nothing to show for it so far.

Alphabet’s revenue growth slowed significantly in 2022, with revenue up just 6% YoY in Q3. While Alphabet’s Google Cloud business is growing rapidly, its core advertising business is struggling against a worsening economy. Additionally, Alphabet’s search businesses may face an existential threat from AI-powered services, such as OpenAI’s ChatGPT, which took the world by storm in late 2022, with Microsoft as a major investor.