The technology sector has had a dismal start to the year, but it remains embedded in major structural trends. Is this a good time to take another look?

Technology: they think it’s all over?

25th April, 2022

Over $50bn was wiped off Netflix’s share price this year as it announced falling subscriber numbers for the first time. Its customers proved more price sensitive than its management team had thought amid an increasingly competitive streaming market.

Netflix isn’t the only bellwether technology name experiencing difficulties. Amazon’s fourth quarter sales growth slowed to 9.4%, leaving investors worried over whether rising revenues would justify the huge sums spent on distribution and infrastructure.

It is tempting to see this as a metaphor for the wider technology market: high valuations based on bloated expectations, which prove vulnerable to a small amount of bad news. There is an element of truth in this. There are certain segments of the technology sector where growth assumptions have been built up over the pandemic, only for the ‘new normal’ to look a lot like the ‘old normal’: people have returned to high street stores and stopped watching box-sets.

This has dragged down growth expectations for the technology sector as a whole. It is also facing a valuation problem: as bond yields rise, the long-term cash flows available from high growth technology companies become less valuable. As inflation continues to outpace expectations, this is a notable drag on share prices across the sector.

This all sounds pretty gloomy for the technology sector, but it needs to be set against some astonishing tailwinds for other segments within technology. The importance of cyber security, for example, has been put into sharp relief as Russia continues to exploit the vulnerability of nations through their computer systems. The trend for companies to digitise is a multi-year phenomenon, still in its infancy. The energy transition is dependent on technology companies to facilitate it.

The technology sector just requires a little more careful navigation than it has in recent years. This will not be a moment when investors can simply buy a handful of big names and hope for the best. They will need to look carefully at those companies that have sustainable growth rather than earnings that have been flattered by the pandemic.

However, some of those structural growth companies are available at far more appealing prices than they were just a few months ago. There may still be further falls, but opportunities are emerging for brave investors willing to look through the current noise.

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This article was sourced from Adviser-Hub.co.uk.

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