The big hangover of the Big Seven: BÖRSE am Sonntag

Big Tech is running out of steam. After years of meteoric growth, Microsoft, Amazon & Co are cutting thousands of jobs. On the stock market, others are racing. The party is over ? Or is it just a phase of weakness that has happened over and over again in the past.

It’s a crash like no other. Shares of major US tech companies were hit hard in 2022 and thus contributed significantly to a bull market turning into a bear market in the stock market. According to an assessment by capital market analyst Pascal Kielkopf, who works for HQ Trust, one of Germany’s largest independent multi-family offices, the seven largest tech stocks of the past decade are worth 4.339 billion. dollars from their all-time highs as of November 15 of this year has lost its market value.

It’s an absurdly high number, the real amount of which seems even more dramatic when, like Kielkopf, you put it in relation. Alphabet, Amazon, Apple, Meta, Microsoft, Netflix and Tesla would have lost more stock market value than all the MSCI Japan and Germany companies are worth together, compares the expert. The 298 stocks included in the MSCI indices of Japan and Germany currently have a market capitalization of US$4.275 billion. “Amazon’s stock market value decline was the largest in absolute terms at $854 billion,” Kielkopf said. “That’s 6.5 times the current stock market value of SAP.” If you add together the drop in market capitalization of Amazon and Microsoft, that alone already exceeds the total value of the DAX 40 companies, according to the analyst. “Tech companies have also lost a lot in percentage terms,” Kielkopf writes. On average, they would come in at a minus 37 percent.

It’s not just investors who are hungover from this performance. The companies themselves are also reacting to the impairments, which taken together also exceed German gross domestic product, and lay off tens of thousands of employees. Is this the beginning of the end of a success story that, until recently, seemed endless? Or just a dry spell? Have the big stars of Silicon Valley overestimated themselves and now exceeded their growth peak sooner than expected? Or is it just a long overdue consolidation? After all, this is not the first time that Big Tech has had to deal with high price losses in a short time. In recent years, there have always been crises, which, in retrospect, would have been good entry opportunities. So what to do? To buy? Sale? Dungeon?

At Alphabet, advertising revenues are collapsing, at Meta the whole business model is called into question

First, the Big Seven each face their own unique issues and challenges. Alphabet continues to make the majority of its sales and profits through advertising on Google and YouTube and therefore remains dependent on a strong economy, without which companies will place fewer ads or will no longer want to pay as much money for these. When businesses need to cut costs, they are more likely to save on marketing. Alphabet feels it now, as it did at the start of the corona pandemic. In the last quarter, group sales edged up 6% to $69 billion, but profit fell from $18.9 billion to $13.9 billion, advertising revenue fell short of expectations and even went from 7.2 on YouTube to $7 billion. Prospects remain modest. The risk of recession has not yet passed in Europe and the United States, which means that there is a risk of a further decline in advertising revenues.

Facebook’s parent company, Meta, is grappling with the same problem. Above all, Facebook itself is starting to shrink and the photo app Instagram is also increasingly under pressure from younger target groups due to the video platform TikTok. Moreover, Mark Zuckerberg invests billions in the Metaverse, but can hardly show success. At Meta, the whole business model is suddenly called into question.

At Microsoft and Amazon, all-important cloud growth is weakening

This is not the case at Microsoft. The software group around CEO Satya Nadella was even able to slightly exceed expectations for the past third quarter and remains well positioned in the market in many promising sectors. However, the Redmond group’s biggest growth driver is weakening. Cloud business as a whole grew only 24%, the important Azure platform grew only 35%, after more than 40% in the previous quarter. This means growth is slowing where investors previously saw the greatest potential for growth.

This also applies to Amazon. The online shopping giant has made most of its profits from the AWS cloud division in recent years. But their growth is also slowing down. Additionally, Amazon created many new jobs and hired tens of thousands of new employees during the pandemic due to high demand. Now that consumers’ buying mood threatens to sink, they are no longer needed but still have to be paid, even though Amazon has already announced job cuts.

Netflix misses the gap, Tesla misses Apple’s China running parts and tapes

Meanwhile, Netflix has gone under the wheels on the stock market as, like Facebook, user growth has recently weakened or even slipped into the red. However, Netflix is ​​also grappling with growing competition in the streaming industry. Investors fear that the so-called fluke is not particularly high when broadcasting films and series. The speed with which Disney has become a major competitor shows that there is some truth to this fear. Additionally, Netflix lacks alternative business models. The widespread entry into the gaming sector is slow.

At Tesla, the latest numbers were strong, with profit more than doubling to $3.3 billion in the third quarter and sales up 56% to $21.5 billion. But even that was not enough to convince investors who expected even more growth. Problems that established automakers have long faced now increasingly weigh on Tesla’s journey. Parts are missing, production is not progressing as expected and political uncertainty in China, an important market for all major automakers, is spooking investors.

Apple is also suffering from the trade conflict between China and the United States. Added to this are the constant corona blockages in the factories of Chinese suppliers, which reduce production. But: Apple is still the best in comparison. Both in terms of numbers and in terms of share price.

Prices are falling for two main reasons

So the Big Seven all have their own construction sites. Nevertheless, it is surprising that all these projects are taking place more or less simultaneously and, above all, that they exert such pressure on stock market prices. There are two crucial reasons for this. On the one hand, there is of course inflation and the resulting rise in interest rates. Nothing new so far. Financing conditions are also becoming more difficult for large tech companies, future profits are worth less in the eyes of investors, and inflation is also making production or business operations more costly for tech companies, for example through higher wages. . Despite having a strong market position, they cannot pass on all these costs to their customers. Perhaps the closest is Apple, whose high-priced products have almost made Californians look like a bunch of luxury goods.

Big growth becomes big value

In addition to rising interest rates, there is another much less obvious but certainly obvious point. Big Tech is on its way from Big Growth to Big Value. Microsoft, Amazon and Co will almost never reach the really high growth rates in the future because they have simply reached a level where sales can no longer double as quickly as ten years ago. The corona pandemic has once again given Big Tech business models an extraordinary boost, without which growth rates could have slowed down earlier. For anyone thinking the same, the Big Seven’s ratings have recently been too high.

However, after the recent sell-offs, this is no longer necessarily the case, although P/E ratios are not yet low. That of Microsoft, for example, is 25.6. This remains high, but is no longer astronomically high. The situation is similar at Alphabet and Apple. The Big Seven undoubtedly also offer entry-level opportunities. After all, at least Apple, Microsoft, Alphabet, and Amazon have business models and market positions that will likely see companies earn handsomely for years to come. Perhaps there will be higher dividends at some point, or in the case of Alphabet and Amazon, a payout at all. In short: Big Tech remains an investment for anyone who breaks the expectation of explosive price increases.

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