Fed and Secular Growth: Technical Challenges

The high and sustainable growth enabled by technology companies has the potential to revive.


© Keystone

The recent stock market turmoil is characterized by a rotation from high-value growth stocks such as tech companies to companies such as banks and energy companies that are benefiting from inflation and rising interest rates. This rotation raises an important question: was the demand surge enjoyed by tech companies at the start of the pandemic temporary? Or was it really the beginning of the digital transition of economic activity?

The second hypothesis seems to be the most likely. As the market absorbs the shock of rising interest rates, it refocuses on companies that offer long-term structural growth. The recent weaknesses of high-tech companies and rising market volatility due to the geopolitical development of Ukraine offer investors the opportunity to take potential winning positions. Specifically, technology companies that can pass on cost inflation and provide solutions that improve efficiency and are exposed to the long-term growth of cloud computing and the digitization of traditional industries are ideal for the future. It is in a good position.

The growth trend is in cloud computing services.

During periods of market stress, there is a tendency for large capital flows to occur and the correlation between stocks to be high. For example, towards the end of January, the market suddenly became unable to ignore the effects of central bank tightening measures. As a result, growth stock sales have become widespread, and implicit correlations between Nasdaq companies have risen to levels not seen since the start of the first-quarter 2020 pandemic.

Going back to the basics

The growth trend is in cloud computing services. Cloud revenue growth accelerated further in the second half of 2021 despite market doubts about the sustainability of the pandemic-accelerated digitization trend.

Powerful results from Amazon Web Services and Microsoft Azure, two undisputed leaders in cloud computing services, invest in infrastructure and laptops to enable enterprise customers to work from home during periods of confinement. It was brought after 2020 as powerful as it was in a hurry. Gartner estimates that the shift in IT spending from existing businesses to the cloud was only 29% in 2021. This, of course, doesn’t take into account the net new spending by the cloud that gives SMBs access to affordable business computing.

Adjacent markets benefiting from this growth include software as a service (SaaS) applications provided by the cloud, and the semiconductors needed for both servers running cloud applications and laptops consuming them. increase. The impact of the pandemic highlighted the benefits of SaaS. This gives enterprises more flexibility and agility in how they use their applications.

The entire automotive industry supply chain and many other semiconductor consumers continue to face challenges.

However, keep in mind that specifying SaaS alone is not enough. Zoom Video Communications was the protagonist, but the company’s stock has actually underperformed since the pandemic began. Microsoft’s success with Teams collaboration software has proven to be far more valuable than simple video conferencing due to its integration with many other productivity tools and its central capabilities in day-to-day operations.

Concerns about the semiconductor sector

The market has recently turned to semiconductors, and news of rising capital investment in this sector inevitably raises concerns about future oversupply. Nevertheless, to assess the value outlook for semiconductors, we must first consider the unprecedented breadth and depth of the current shortage. New fast-growing markets for automobiles and automated factories are adding to the demand for semiconductors related to cloud computing.

The ability of machine manufacturers to provide the tools needed to increase the production capacity of companies such as the Taiwan Stacked Circuit (TSMC) is another factor to consider. Despite reports of inventory replenishment, the entire automotive industry supply chain and many other semiconductor consumers continue to face challenges.

Adding new capacity is often a valid warning signal for the inventory performance of semiconductor manufacturers and their suppliers. However, there are also extreme restrictions on the provision of the tools needed to increase the production of semiconductor wafers.

Ironically, one of the major productivity gains built into today’s production tools is the addition of sensors and other semiconductors to monitor and control the behavior of the tools, but as chip shortages continue. , Manufacturers will not be able to produce the tools customers need to make the chips they need. .. So while Intel, TSMC, Texas Instruments and others have made big announcements about their multi-billion dollar investment in new semiconductor fabs, it can take a year or two to be produced. The integration and rising production costs over the last few decades have created an unprecedented concentration of market power in many semiconductor segments, as evidenced by the structural increase in profit margins enjoyed by the industry. ..