The Financial Year in Tech 2018: Highs, Lows and Future Trends
2018. What a year it’s been. The tech industry has given us huge highs and lows this year and stock prices have soared and tumbled in equal measure. Here, we take a look at the high level of the major tech companies and industry trends we follow here at Wccftech as well as what we can look forward to in 2019 with my usual forward guidance. It's worth keeping in mind for anyone watching the market at the moment that liquidity is extremely thin in December and as such, any buyers and sellers are moving markets by bigger margins on smaller volumes than normal.
2018 – The Highs
The little electric car company that could finally showed us that it… could? That’s right, we’re talking about turning a profit. Tesla has been a rollercoaster stock in recent years and the “will it, won’t it” saga has gone on for a long time. Tesla has turned a profit once before this year but we don’t count that since it came from selling electric car credits to other manufacturers. 2018 is the year that Tesla finally turned the corner and hit profitability from ACTUALLY MAKING CARS. The Model 3 did what Elon Musk promised and ramped production to a level that allowed the carmaker to turn a profit. Volatility aside, the stock is basically flat in Q4 which is actually a great performance considering a lot of other stuff is down 20%.
A long, drawn out saga running to several years in length. Michael Dell’s eponymous company, having had enough of activist investors who battered the company’s stock given its heavy exposure to PC and lack of alternative revenue streams went private in a media frenzy back in 2013 with backing from Silver Lake, Microsoft and others to try to restructure away from the gaze of Wall Street. 5 years later and with even more arguments with activist investors over the wrangling from its non-IPO return to public markets and appropriate valuation levels, the firm is about to re-enter the limelight as a publicly traded tech company again.
Under Satya Nadella, Microsoft has continued to reposition itself successfully into what was supposed to be the “post-PC” era. PC is still a thing of course, but Microsoft has definitely been an earnings success story for the year. Windows 10 has been gaining traction, gaming and cloud have grown faster than expected and the recent tie-up with Refinitiv (formerly Thomson Reuters Financial & Risk division) will likely see its Office 365 product gain greater penetration, a move which the company would no doubt welcome as it looks to shift users to a subscription model which much of the tech world pursues.
The world’s first trillion dollar company. Well, for a little while at least. Apple has since dialled back its sky high valuation with a market cap that looks to finish the year around $750 billion, but the history books have been written and nobody will take that away from Tim Cook.
Trump Foreign Cash Repatriation Holiday
Love him or hate him, President Trump has had a big success in terms of tech world finances with his plan to make big companies bring overseas cash hauls home. Big tech was one of the worst offenders when it came to squirreling away cash in tax havens and just letting it sit there doing nothing. A massive discount to bringing the cash back to US shores and deeming the cash repatriated later and we’ve got capital doing what it should be doing again, looking for the best way to be invested and gain a return. As predicted in my piece 2 years ago, this has seen an increase in dealmaking and M&A activity across the technology industry.
2018 – The Lows
While 2017 was regarded by many as the rise of the cryptos, 2018 was the year that cryptocurrencies, digital assets, whatever you choose to call them came crashing down to the ground and hard. With widespread institutional and regulatory investigation into what is going on in the crypto world. Distributed Ledger Technology (DLT) seems to be the undisputed takeaway from the crypto boom and certainly has many real world applications but the replacement of fiat is a long way off. Good news for GPU buyers but bad news for a lot of investors.
For a variety of reasons, numerous chip stocks have had a mediocre year. The bursting of the crypto bubble hit AMD (NASDAQ:AMD) and NVIDIA (NASDAQ:NVDA) hard, although AMD does finish the year with its stock up (from about $11/share to about $17/share) as it has continued to successfully reposition its CPU business. NVIDIA, Intel (NASDAQ:INTC), Qualcomm (NASDAQ:QCOM) and Broadcom (NASDAQ:AVGO) are all down on the year. Couple this with fallout from the trade war between the US and China hitting Qualcomm’s attempts to acquire NXP (NASDAQ:NXPI) (Chinese regulators didn’t approve the deal) and although the companies have made money this year, stock performance hasn't matched trading performance. Quite normal in the tech world where companies often trade at huge multiples of P/E on the basis of future expectations.
What Trump giveth with one hand (tax cuts), Trump taketh with the other (tariffs). It’s impossible to discuss finances (and in particular tech finances) in the current climate without touching on politics and the trade war between the US and China. Tariffs have started to bite and tech has undoubtedly borne a significant part of the burden of the trade war between the two giants. ZTE, Huawei, Apple, NVIDIA, Foxconn and others have all been scrambling to figure out whether the trade war has legs or not and what to do to mitigate it if indeed it does become a long term part of the financial landscape.
Yep, 2018 has seen numerous problems for the electric carmaker, particularly in the shape of the famed “funding secured” tweet from Elon who was looking to take the company private to escape short sellers. An SEC investigation, loss of board control, lawsuits from shorts and ultimately fines for both the company and Elon Musk ensued. Volatility in the stock has been off the charts and it finishes the year basically flat. Investors will be hoping for a quieter 2019 where its CEO avoids the controversy he has become known for and focusses on delivering cars.
It’s been a tough year for social media, particularly in the shape of Snap (NYSE:SNAP) despite better than expected earnings in February, the overall story of the year has been one of poor performance. A slated redesign, criticism from stars and a two thirds collapse in share price. Competition from Facebook ((NASDDAQ:FB) owned Instagram has been intense and many question whether Snap has the legs to continue at its current level of investment.
Facebook itself of course has had its own issues this year with international government scrutiny of its operations at a high water mark following a number of scandals in recent years, culminating in the Cambridge Analytica debacle. Facebook finishes the year almost a third down on its opening price.
Apple (also again)
Have we reached peak iPhone? The market seems to think so and it looks like Apple does too. From the heady heights of being the first trillion dollar company in the world, Apple’s stock has collapsed by over 35% following continued legal tussles with Qualcomm, supplier profit warnings indicating scaled back orders for the latest devices and Apple itself saying it will no longer break out sales numbers of its devices in earnings reports. The trade war hasn’t helped of course given that Apple’s devices are mostly manufactured in China.
Apple is still making huge, fistfuls of money of course, but the mammoth growth prospects of yesteryear on current product line-up look mediocre at best.
2018 – Themes
Politics aside, Brexit has seen numerous jewels in the UK’s business crown get snapped up cheaply by foreign companies as the pound has continued its rollercoaster ride. With cable (GBPUSD) bumbling along at lows not seen since the 1980s and the prospect of a no-deal Brexit coming into rapidly sharper focus by the day, business faces significant disruption as political deadlock in parliament means contingency planning in EU countries by numerous financial services firms is already well underway with investment in the UK put on hold and sizeable business from the UK’s finance industry already in the process of moving to Frankfurt, Paris, Amsterdam and others.
This of course also makes investing a hugely worrisome affair for us Brits as in the event that sterling recovers after we've moved money abroad, the gains will all be eaten away when we try to bring it back to the UK. Similarly, if a Labour government led by Corbyn comes to power any time soon, it is likely that the market will react badly and UK based investments will perform poorly. Politics unfortunately interfering in business.
2 years ago, we called the incoming President Trump a “too early to tell”. Politics aside, it’s clear that the President has created significant uncertainty in the global business landscape, perhaps none more so than with his tariffs on China and his approach to multilateral international trade in general. Couple this with fierce criticism of his own handpicked Fed Chair Jerome Powell for US monetary policy and then Steve Mnuchin scrambling (and failing) to attempt to reassure markets in the face of investor concern over his boss’ seeming hatred of the Fed and it’s difficult to see how the market will react positively.
2019 – Forward Guidance
Finance and tech company finances in 2019 and beyond are likely to be dominated by the political landscape. We’ve already seen a huge selloff in the equities markets in the fourth quarter of 2018 with investor confidence shaken significantly by the huge degrees of uncertainty created in the global economy. Politics aside, it is clear that President Trump has rattled global markets and investor confidence in sustained growth after one of the longest bull market runs in living memory.
It’s not just the US either, although most major tech companies are US listed. The FTSE 100 (UK), Nikkei (Japan), Hang Seng (Hong Kong), DAX (Germany), CAC (France) and other major global indices have all joined the Dow, S&P, NASDAQ and PHLX SOX in collapsing into freefall territory since October, with trading over the Christmas period being particularly poor and the US officially hitting a bear market just before Christmas.
It's worth keeping in mind that this may be the result of rattled investors amid the traditionally light volumes that accompany December trading, however the market has had ample opportunity to recover in Q4 and seems to have been struggled to do so. As such, this seems like something that is less likely to be just shrugged off come January. Stocks are still predicted to grow in 2019, but perhaps with less vigour than in the past. A retrospective may be required of global political leaders if they are indeed to shepherd us towards stable, continued growth.
Tech stocks have fuelled much of the overall market growth since the 2008 crisis and investors have piled into them hoping to ride the wave of ever higher gains. When a market gets valued that highly, inevitably the correction will disproportionately hit it and this is some of what we’ve seen happening recently with gains and losses on blue chips amplified in tech stocks.
Monetary policy is likely to continue to be tightened, albeit Jerome Powell seems to have taken note of President Trump’s dismay at continued rate hikes and has indicated that the Fed is approaching what it feels is a neutral rate with markets pricing in 50 basis points spread over a couple of hikes in 2019. Trump has reportedly acknowledged to his new chief of staff Mick Mulvaney that he doesn’t have the ability to fire Jerome Powell outright and it is unlikely that the President would be able to justify a stock market collapse or a recession as sufficient cause to fire the beleaguered Fed chair (who technically reports to Congress, not the President).
Even so, it may be that the continuous public pressure from Trump leads to a Powell resignation. That would be problematic since the entire objective of central bank independence is to avoid political interests driving monetary policy with short termism in mind and the chaos that ensues with such policy decision-making.
Political deadlock in US domestic policy with the incoming Democrat majority in the House of Representatives means that the President is likely to do what many of his predecessors did when they couldn’t get things through congress and turn an even sharper eye onto foreign policy. The trouble is, US foreign policy under Trump is the kind that markets don’t seem particularly fond of.
If markets don’t recover quickly in 2019, look for sector rotation out of high growth tech stocks into more staple goods companies as well as money leaving equities and moving into fixed income. Particularly highly priced P/E stocks may suffer disproportionately in this case but it’s important to note that there will likely still be value in equities, stock pickers will just need to be more judicious in their selections and focus on companies with solid strategies and earnings and reasonable P/E ratios.
It’s also worth keeping in mind that poor stock performance alone doesn’t mean the company itself is doing badly. NVIDIA has lost over 55% from its high this year and is even down 35% on its start of year stock price, the company is still making money of course but is now trading at a much more sedate 17 P/E which could look very attractive in a couple of quarters time once its excess inventory has worked its way through the system. For medium to longer term investors, the bear market looks to be a buying opportunity.
Even without a recession (which is probably due), the investing world will be highly charged and looking out for any misstep in the global system of governance which has existed for a long time. Protectionism, stepping away from the rules based international order of markets, a nasty Brexit, trade wars moving away from just tariff based issues and into broader regulatory retaliations as well as aggressive unwinding of US government bond positions will all be danger signals for traditional technology growth stocks.
Tech still has a lot to give and fintech in particular is probably still a growth area, however concerns over some startups getting into areas which they know little about, particularly given how heavily regulated the financial services industry is can be problematic. Robinhood recently found this out when it tried to launch a Checking and Savings account paying 3% interest but then discovered it wasn’t insured to offer such facilities. A rebrand later and senate recommendations to the SEC and FDIC to keep an eye on fintechs have made for a steep learning curve for the company.
If the global political landscape can simmer down a bit, we may just have a positive 2019, but nerves have definitely been shaken. Much like Tesla investors will be hoping Elon Musk calms down a bit, global investors will be hoping that the various political storms which are brewing can just back off to give some calmer horizons.
As ever, I wish all of you and your friends/families a prosperous year of investing in 2019.