The Financial Year in Tech 2019: Highs, Lows, and Future Trends
Recession or Rally? Trade War; Impeachment. 2019 has been a volatile and exciting year for world affairs, and the same holds true for tech. Some tech companies have been the biggest drivers of growth on the market, but at the same time, some tech companies have also been huge laggards and have underperformed compared to broader trends.
As 2019 comes to a close, let’s look back at some of the highlights (and lowlights!) of the year that was.
2019: The Highs
CD Projekt Red WSE:CDR
This has been a big year for CD Projekt Red, and the stock sure shows it. Listed in Warsaw, the studio behind The Witcher series, as well as the digital distribution service GOG.com, saw its stock rise around 85% during the course of the year from 151 PLN ($39.60 USD) to nearly 277 PLN ($73.65 USD). Since its initial listing in January 2013, the stock has added 248 PLN ($65 USD) to its value -- an increase of nearly 3,815%.
So why the big year? A few reasons. First, the company’s marquee The Witcher franchise was adapted into a miniseries and premiered on Netflix. Terms of Netflix’s deals with IP rights owners are often a blackhole; the streamer maintains strict confidentiality agreements with its partners. That being said, Netflix agreements are known to be quite lucrative especially with regards to the performance of the show (Netflix’s data on show performance is another closely guarded secret). While The Witcher hasn’t been a success with critics, it’s been a hit with audiences and modeled data from Parrot Analytics shows that it's one of the biggest shows in the US.
Next up is the goliath that is Cyberpunk 2077. Set for release in early 2020, this is one of the most anticipated games of the year and is expected to hit sales in the 20 million mark according to analysts’ estimates. According to public reports, the majority of the pre-orders have occurred via GOG.com
That leads to the next reason why this stock is a monster: GOG.com. Owning the distribution channel puts any business in a hugely advantageous position; this is why Amazon NASDAQ:AMZN is investing billions in its own logistics network, or, closer to home, why nearly every game developer also has its own digital game store. But not every game store is the hit GOG.com is. While it can’t compete against Steam in pure market share, and exact statistics are spotty, the company seems to command about 15% of the digital distribution market. This makes for some nice recurring revenue for the company. But things aren’t all rosy: reports from earlier this year said the company was laying off staff as revenue wasn’t hitting targets.
AMD continues its comeback story with a solid 2019, seeing its stock rise approximately 150% over the course of the year, closing 2019 at around $48.
AMD hasn’t been in such an advantageous position for some time, as its success with the Ryzen lineup of chips echo back to the days of the turn of the century when AMD squarely beat Intel NASDAQ:INTC in the race to 1GHz, or in 2003 when AMD had the first 64-bit processor with the AMD Athlon 64. AMD has helped by Intel’s stumbles throughout the second half of 2019, with the departure of key marketing executives in its consumer GPU department, and the total flop of the Core i9-10980XE which can’t keep up with the AMD Ryzen 9 3950X.
Although AMD is catching up, Intel still has a commanding market share, but that’s only because it rules the channel space. A sizeable majority of notebooks or PCs sold from the likes of Dell, Asus, or Acer -- particularly those marketed towards gamers -- ship with either a Core i7 or Core i9. This is because Intel can subsidize the placement of these chips into these machines via Market Development Funds. Effectively, whenever you see an Intel badge on a PC advertisement, Intel paid in full for the advert (or part of it). Intel still has the deeper pockets in this regards; even though AMD has been enormously successful this year, Intel can still outspend on advertising.
Just remember, this hasn’t always been the case. In 2006 the market was virtually split in two with Intel owning 51% of the market to AMD’s 48%. It’s doubtful that such a close share will ever happen again but given Intel’s stumbles this year, it’s also not impossible that AMD could gain another 10% or more throughout 2020.
The processor space is once again competitive. It’s going to be an exciting space in 2020, and a sector to watch intensely.
Big Chip Energy: TSMC TPE:2330 & KLA Corporation NASDAQ:KLAC
Given the overall success of the technology sector this year, it’s no surprise that two key companies within the chip supply chain had an exceptional 2019.
Taiwan Semiconductor Manufacturing Corporation, or TSMC, should be a familiar name to readers of Wccftech. As the world’s largest contract semiconductor foundry, it makes the chips that the likes of Nvidia NASDAQ:NVDA, Apple NASDAQ:APPL, and dozens of other companies design.
With a strong demand for silicon, TSMC posted a banner year in 2019 with the stock rising 50% throughout 2019. The company also expects 2020 to be an exceptional year, as demand stemming from 5G will likely boost demand for its silicon. During its most recent earnings, the company allocated an additional $15 billion in capital expenditures for 2020. According to reports, around $1.5 billion of the additional allocated budget is for increased production of 7 nm chips and $2.5 billion is allocated for 5 nm, which will go into commercial production in 2020.
On the other hand, KLA Corporation might not be as well known to readers as TSMC. But as a key supplier of equipment to TSMC -- and other fabs like it -- it’s another company with exposure to the ever-increasing demand for silicon.
And the stock shows it: up approximately 98% on-year, the company has beat most of the major indices and has posted solid results similar to TSMC, and other peers in the space. Effectively, it's a proxy for the future health of the market as fabs like TSMC would need plenty of lead time to order new equipment from KLA before expanding in order to meet future demand. That being said, according to 13F filings with the SEC, KLA has received considerable interest from hedge funds with an approximately 12% increase hedge funds adding new positions or adding to an existing position. Is this a sign that the silicon bubble is about to burst? Not necessarily, but it does show that there are those that doubt the sustainability of this growth story.
2019: The Lows
This is an odd one. Corning is a specialty glass company with exposure to both the smartphone market via its subsidiary Gorilla Glass, and the 5G revolution thanks to its glass being used in fiber optic infrastructure that powers the backbone of the world’s telecom network.
So why is this stock doing so poorly?
Maturity of the market.
We’re no longer in the booming era of smartphones. Everyone has one, and what’s worse is that the refresh cycle has lengthened considerably. While Apple’s latest iPhones exceeded the company’s expectations, in the grand scheme of things the numbers are weak and the market is stagnant. Case in point: the latest numbers from IDC show that the third quarter was effectively flat with a mere 0.8% growth in handset shipments. Now compare that to 2011, when IDC reported that smartphone shipments rocketed 61.3% compared to 2010. Between 2011 and 2019 the average selling price of smartphones dramatically increased as vendors competed with each other to cram more features onto the device like dual, and now triple cameras, bigger screens, and faster chips so that they could preserve margins in this market. But Corning’s Gorilla Glass unit just sells glass -- the product hasn’t changed much from when it was first introduced. So in an era of thin sales, this is not a compelling product for shareholders or the market.
Next, to 5G. One might associate 5G with a big, broad infrastructure play as building out the ultra-high bandwidth wireless network means that telecoms will be required to build out the associated fiber optic lines -- a potential win for Corning as fiber optic cables are all glass. But this is not the case, in fact there’s more than enough fiber capacity now to meet the current demands of 5G.
“Carriers are now cutting back on ‘additional’ fiber investment until they have increased visibility on 5G demand, which won’t be available until later in 2020 when services are rolled out,” wrote Susquehanna Financial analyst Mehdi Hosseini in a recent report covering Corning. “Commentary from the likes of AT&T suggests there is enough fiber already in the ground for the initial rollout of 5G services. We also don’t expect significant capacity additions among the Datacenters.”
Chief Financial Officer Tony Tripeny echoed this sentiment in last quarter’s earnings call: “Our 2019 [optical communication sales] outlook has been impacted by a major fiber to the home customer.”
This all might change in late 2020 or early 2021 as telecoms initiate a big round of infrastructure upgrades to accomodate a perceived uptick in demand from increased 5G usage. But until then, expect Corning’s stock to come back to earth to reflect a price indicative of its reduced earnings.
Where do we start with crypto.
On year, the price of Bitcoin was down 48% which led to a slow market for other cryptocurrencies throughout the year.
This was also supposed to be the year that cryptocurrencies “went legit”. Initial Coin Offerings, or ICOs, were the scam of the year in 2017-early 2018. An EY study from October 2018 analyzed the top ICOs that represented the majority of funding during 2017, and by the report’s publication date, only 29% of the ‘Class of 2017 ICOs’ had working products or prototypes, while 30% had lost substantially all value.
The solution to this came in two forms: one called Security Token Offerings, or STOs, and the other called Initial Exchange Offerings, or IEOs.
STOs are in many ways like ICOs with one key difference: they register with market regulators as a security and abide by the rules. Some markets that aren’t traditionally known as financial hubs, like Taiwan and Thailand, have drafted specific laws pertaining to STOs with a hope of attracting new, non-traditional capital into their markets.
The problem is? STOs have been a non-starter. According to STO list, there are well under a hundred active STOs on the market. In addition, they are largely situated in traditional markets such as the US, Singapore, and Panama as opposed to new markets, like Thailand and Taiwan.
IEOs, the other alternative to ICOs, appear to be just as prone to scams as the offering they are trying to replace. According to BitMEX research, the 11 IEO tokens that it had tracked since May 2019 have declined in price to under their initial offering. This really doesn’t bode well for a new investment vehicle that’s looking to define itself against one that was largely synonymous with scams.
In many ways Tesla had a great year. Unlike the other companies in this lows section, its stock is actually up around 30% on-year thanks to positive earnings and it opened a second factory in China with another planned for Europe in the near future. In fact, hedge funds are also reducing their holdings of the stock according to 13F filings.
So why is it still one of the year’s lows? The return to profitability in the most recent quarter was a game of smoke and mirrors as detailed in its most recent 10-Q filing. Moving cash around in order to get the books in order, as opposed to a legitimate increase in revenue thanks to more cars on the road. One key aspect of this was reducing the per-car “warranty reserve”. This is the amount of cash set aside for each car sold for anticipated warranty repairs. By moving some of this cash around it added another $37 million in third-quarter pretax income.
On one hand, this could be because the company has more confidence in the quality of its supply chain and manufacturing capabilities. After all, Tesla owners report that the build quality is improving. At the same time, there are still plenty of issues with the build quality and software bugs.
Profiting from the Trade War
Although the US-China trade dispute has cost both sides hundreds of billions of dollars from increased tariffs and drops in economic productivity, there are also markets that have cashed out from this dispute. Case in point: Taiwan. As Wccftech reported in June, Taiwan has come into the spotlight as an alternative manufacturing hub. The IMF forecasts Taiwan’s GDP growth to hit 2.5% in 2019. In comparison, manufacturing rival Korea, which signed a much celebrated free trade pact with China in 2014, is expected to grow at 1.8%, while financial and logistics hubs Hong Kong and Singapore are forecasted to grow at 2% and 1.5% for the year respectively. In fact, figures on Taiwan’s economic growth keep being pushed up and when the official figures get released for 2019 in Q1 2020 it might still be higher.
It just might actually happen this year. KPMG has come out and officially said that Brexit will likely cause a recession in the UK in 2020. But how will this impact the broader global market? Not by a lot. Global markets will likely be insulated from the impacts of Brexit, according to Lesley Marks, the chief investment strategist at BMO Private Banking. If you look back at the equity market for 2019, Brexit wasn’t on its mind as stocks soared to all-time highs. Within the UK itself, there will likely be a downtick in consumer spending, but it won’t be the end-times that many have predicted. It might be a short, nasty recession, but probably over soon after.
Brexit has also significantly damaged the value of the pound, making UK companies more attractive targets to foreign firms with ARM being snapped up by SoftBank. With a large majority in parliament,’ Prime Minister Boris Johnson’s Conservative party has steadied markets that have been in limbo for years with a weak pound and poor equity performance. Sterling gained in the aftermath of the election result and money poured back into UK equities pushing valuations up, however, although Brexit itself will happen, the nature of the future trading relationship between the UK and EU is still up for debate and may result in a harmful economic landscape depending on the outcome.
Global markets have been buoyed by continued relaxed interest rate policy, with the Fed leading the way, and (as much as it says otherwise), bending to President Trump’s will for monetary easing. A trade deal between the US and China with tariff easing and continued lax monetary policy will likely keep markets reaching new highs in the short term, but central bank balance sheets the world over are huge. Given that we’ve now gone a decade without the largest economy in the world hitting a recession, concerns about markets being propped up artificially are front and center in a lot of people’s minds.
When a downturn hits, there is little in the way of fiscal or monetary ammunition available to governments and central banks to combat it given low-interest rates and corporate/personal tax giveaways which have taken place in recent years which may make any downturn harder to get out of. Still, for now, markets are happy, and other than Fed interventions in the repo market still being a thing, there doesn’t look too much to be worried about. Still, as Warren Buffett once said: “It’s only when the tide goes out that you see who is swimming naked”. Undoubtedly the beginnings of the next global financial crisis are out there, whether it is instigated by a Chinese debt black hole, overblown private equity and venture capital market valuations, or something else, we’ll have to see.
For now, we here at the Wccftech Finance section wish you a prosperous new year of investing.
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