Tech outperformed the market by 14% in a strong 2Q and was up with the market in July. The growth-to-value ratio is historically high and tech remains overbought given over 80% of names above their 50-day MA. However, a significant correction continues to be pushed out, and we have difficulty seeing a negative near-term catalyst with Covid proving stubborn and work-from-home likely a secular change. China retaliation may be a wild card.
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Every time a correction looks imminent, tech kicks into high gear. The power of platforms was on display, both in Congressional testimony and the big four’s earnings reports. Our Wolfe Tech Universe rose 2.9%, ahead of the S&P 500’s 1.7% gain, led by Internet, Software, and Semis. The same three sectors lead year-to-date (Exhibit 2). Top stocks this week included Pinterest (+40%), Wirecard (+22%), Wayfair (+19%), Qualcomm (+19%), and Etsy (+17%). Laggards were Konica Minolta (-25%), Canon (-21%), Ricoh (-17%), F5 Networks (-11%), and Alps Electric (-10%).
The AI arms race is on . Following the success of Google’s BERT with Natural Language Processing (NLG), tech researchers have joined the race to produce a superior AI language. OpenAI started as a non-profit in 2015 by founders including Elon Musk. The goal is to revolutionize the construct of artificial intelligence tasks and learning capabilities for answering questions.
The opening CEO statements reflected company concerns. Apple defended its App Store economics, Amazon its consumer and third-party seller benefits, etc. Bezo’s longer statement, even excluding the personal preamble, left us thinking, “Wow, what a company and executive.” Bottom line, we could see a couple turns P/E contraction due to antitrust, but we don’t see new companies disrupting them at this point, which history suggests is the greater risk.
Wide stock but narrow sector results in first earnings week. Despite weakness in large tech this week, our Wolfe Tech Universe performed in line with the market’s slight decline. Sector performance was tight with only a half percentage point separating Software (flat) and Internet (-0.5%). Internet and Software lead YTD; Semis have outperformed the market but lag within tech. eCommerce and Security have been the best subsectors (p2). Top stocks this week included AMD (+26%), United Micro (+20%), MediaTek (+11%), HCL Tech (+9%), and AAC Tech (+9%). Laggards were Wirecard (-20%), Intel (-16%), Semi Manufacturing (-12%), Xerox (-10%), and Snap (-10%).
Early reactions to earnings have been somewhat negative with valuations and expectations high. Growth is yielding ground relative to value, and tech may be entering a correction.
Now that workloads are in multiple clouds, it all needs to be managed. Over half of companies use public cloud infrastructure. Cloud management platform (CMP) software helps users manage cloud apps, whether in public clouds, on-prem private clouds, or colocation facilities. James Sanders of 451 Research takes us through the technologies and vendors involved.
It was a Bizarro week. Trends reversed with the Wolfe Tech Universe’s 0.6% decline lagging the S&P 500’s 1.2% increase. Typically, underperforming Hardware and Services led while Internet and Software were weak sectors as value beat growth. Internet remains top over both 3 and 12 months (Exhibit 1). Top stocks this week included Wipro (+18%), Infosys (+16%), Ericsson (+13%), Dell (+13%), and Xerox (+12%). Laggards were SMIC (-30%), Wirecard (-15%), CrowdStrike (-13%), Smartsheet (-11%), and AAC Tech (-12%).
Most VARs told us the year has unfolded as follows. Jan and early Feb were quite strong, better than the usual seasonal weakness. Demand began to weaken in later Feb, plummeted in March, and bottomed in early April. May was up sequentially, and June was better though down year-over-year. So far July is similar to June.
Yesterday we presented a 451 Research survey on digital transformation and cloud adoption (link). Here we show results from a recent survey of about 250 IT execs regarding their spending plans given Covid-19. Company disruption from the virus has been less than feared. In March 27% felt they could operate indefinitely under current circumstances, which now is 41% (Exhibit 1). This responsiveness likely contributed to recent vendor results being better than expected. In fact, respondents indicate an increase in spending plans, especially cloud adoption (Exhibit 2). Digital transformation efforts slightly benefit.
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