As technology stocks feel the heat from the market selloff Kim Parlee speaks with Vitali Mossounov, Portfolio Manager and Global Technology Analyst at TD Asset Management, to discuss his outlook for the sector and whether this is a replay of the dot-com crash.
- The recent volatility we've seen in the markets has been especially hard on the formerly high-flying technology sector with many of the biggest names in tech down close to 20%. Joining us now to discuss the situation and whether the worst is past is Vitali Mossounov. He is Global Technology Analyst and Portfolio Manager at TD Asset Management. Vitali, it's been a tough, tough market for the past month or two. When we spoke three months ago, I think it was the last time, we were already in correction mode for the tech sector. In the past 90 days though, things have really only gotten worse really for the tech sector overall. So what's changed?
- Things have gotten a lot worse. And I remember being, well, here in the virtual world 90 days ago, and we were talking about tech having a pullback, the overall market still hanging in there. And as we look now a significant correction in the market, a more than significant correction, I would say, in technology.
So what's changed? A lot of the same things have gotten worse. That's what Mike's been talking about. You have the specter of inflation that continues to grow. We have the Fed that continues to pile on, or at least so we're afraid, and ultimately what that will cause. Will that be a big bad recession that will end the party? And so everything has sort of started going down.
And when we look at sector by sector you can see there's a couple of places to hide. You can hide in utilities or consumer staples. Again, investors are fearful. Those are stable free cash flows. But anything to do with the real economy, technology, consumer, financials, that's really taking a big hit.
- Yeah, and we're mentioning in terms of where you can hide. You mentioned utilities, also energy being a place you can hide here too. But yeah, not looking great for the tech side here.
- And energy, it's very obvious why investors are piling in there due to unfortunate circumstances. But again, all the sectors that you would expect on the back of a strong consumer economy, those are struggling, to put it mildly.
- You talk about how you think within technology there's basically a story of two markets right now. What do you mean by that?
- Yeah, absolutely. Within technology we talked about investors really shortening their time horizon, being afraid for the future. And so what are they seeking? They're seeking safety. You can find safety in large companies. You can find safety in very profitable companies. So if you look at businesses that have these large market caps greater than $100 billion, if you look at companies that are very profitable, we decided to cut that off at 20% profit margins,
- They're still down. They're down significantly, down 20%.
- Yeah. I'm going to just pause there because I want to bring up the chart because it's saying what you're saying. But keep going.
- No, and if you look at smaller businesses, below $100 billion businesses with a lack of profitability, again, that's where all that pain is. Those are down as much as 40%, including some of the darlings that went so high during the last two years.
- Yeah. And I think some people might be saying the worst may not be over for some of those too, in the next little while. We'll see. We'll see. We got through earnings season. And anybody who even slightly missed really got taken out, quite frankly. So what are the big takeaways for you in terms of watching what you saw?
- I think earnings is a tough one to summarize, and tech always is a very heterogeneous sector with a lot going on. And so you and I, we always go back to the big five, the big tech, and how did they do? And typically they do good or great. And this quarter was a bad time for them to show a bit of a mixed print.
- Some good, some bad. Overall, let's be fair to them, they grew sales 15% as a group. That's well above the economy. That's well above the S&P 500. But just the number of blemishes here and there. And again, same theme. Investors are fearful for the future, a lot of uncertainty. They pull in the time horizon. So a blemish becomes a fatal wound for your stock in this market.
- Let's take a look at some of the ones that came out. And let's start with Microsoft, which I think is held up better, I think, than most at this point. But tell me what we're seeing here and just what you saw from their earnings.
- Well, we'll go to our traditional charts showing their overall level of revenue growth. Ultimately what is demand for their products and services. Microsoft is, and has always been, this paragon of consistency in technology. No different this quarter, 20% sales growth, 20% earnings growth. And that met expectations. That's the middle bar on the chart. And guess what? As you said, it's held up. It held up really well. In fact, investors rewarded the results. The stock was up 5% the next day. But I think we know what's happened subsequent to that. Again, fundamentals don't matter. Same theme, uncertainty, results pass, and then fear all over again.
- Yeah. It becomes the correlation of one, everything trade with everything else. But in the moment they had some good earnings. What about Amazon? Was it the same story?
- Well, Amazon, it was a tough one to dissect for the market. Now, if you just look at the top line, we're going to have to give Amazon kudos because they grew sales 9% in constant currency. And a year ago they grew 40% as everybody was doing what we were doing, probably shopping online. So they still grew 9%. That's very, very good. And the reason that Amazon had that really ugly 14% share price reaction the next day was profitability.
So they came out and had used the word blemishes. They said, there's a lot of things out of our control and under our control. But a lot of bad things are happening. We overbuilt. There's extra cost and inefficiencies. We hired too much staff. There's supply chain issues. There's China lockdowns. Freight is more expensive. All that piles on, and by the time it's done they don't really have any profits left. And again, investors, well, they're not too happy about that right now. They won't take management's word for it that things will get better.
- Yeah. They want to see it. And that thing they said about too many staff though, is a bit of a red flag from an economic standpoint on another front. But that's another conversation.
- And they were hiring like crazy last year.
- Yeah. Yeah. Yeah. That's part of it. Listen, I've only got about 30 seconds here. But people see this tech sell off and they tend to think of back to the dot.com bubble. Similar? Not similar?
- Well, this comes up every time there is a tech correction. I think a lot of people almost want that to happen and try to will it to happen. I think we need to be careful. Long-term investing success is very much about buying great businesses and paying the right price for them, not overpaying. If you look at the cohort of technology companies today, they are integral to consumer and enterprise lives. They're great companies, cash flow rich. Those cash flows are growing. We saw two of them moments ago.
There was a very different picture in 2000, even with the blue chip companies back then. And then valuations again. So important what you pay for an asset. Today these same tech companies, they're all out there at about 20 times earnings or so. Well, that's about 20% premium to the market. We look back to 2000. You paid almost double the premium, the evaluation of the average stock. And in absolute terms, I won't even quote the number because it'll shock you. So very, very different in that core blue chip category.
- Yeah. A lot of evolution since that time too.
- Vitali, always a pleasure. Thank you.