Harvest Portfolios Group
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Why are Tech Stocks down when fundamentals are still strong? | HTA

June 20, 2022
Why are Tech Stocks down when fundamentals are still strong? | HTA

By Harvest ETFs

Retirement IncomeTech stocks have struggled so far in 2022, erasing some of the historic market-leading gains they made in 2021. This pullback in the sector has prompted, as it often does, apocalyptic headlines and allegories to the 90s tech bubble. However, tech companies are not showing the same characteristics they showed during the bubble. In fact, they’re continuing to show solid earnings growth and continued performance despite market sentiment.

James Learmonth, senior portfolio manager at Harvest ETFs and the portfolio manager in charge of the Harvest Tech Achievers Growth & Income ETF (HTA:TSX), explained that tech stocks’ recent performance comes down to a mixture of macro uncertainty, investor sentiment, and an environment of slowing—though still positive—growth.

“This sector’s turn is driven more by fear than fundamentals,” Learmonth said.

How Fear is Impacting Tech Companies

A few key narratives are playing out in tech stocks at the moment, Learmonth explained. The first is broad-strokes macroeconomic uncertainty, caused by high inflation, expectations of central bank rate hikes, supply chain issues, and war in Ukraine. The second narrative is more tech-specific as investors believe enterprises brought some of their tech spending forward in 2020 and 2021 to cope with the onset of the COVID-19 pandemic. The widespread belief is that as the pandemic subsides, enterprises will spend less on tech.

Gartner Inc. does forecast a slowdown in tech spending in 2022, however that ‘slowdown’ is still showing positive growth. Gartner forecasts overall tech spending to grow by 4% in 2022, reaching over $4.4 trillion. Because that number follows 9.5% growth in 2021, it might seem to fit into the easy story of a tech spending pullback from enterprises. However, Learmonth noted that many measures of enterprise spending have remained strong in 2022. Accenture, one of the world’s largest IT services companies, measures the global enterprise shift towards the cloud— what Accenture refers to as “digital transformation spending.” While some of that spending has been brought forward through the pandemic, Accenture estimates that enterprise spending has only hit 30% of what will be needed to complete that transformation.

More of the slowdown in growth has come from less consumer purchases of PCs and other devices, Learmonth explained, but enterprise spending on tech has remained remarkably robust considering what had to be brought forward in 2020/21.

Despite this, the overarching macro conditions have compressed the value of tech stocks significantly, somewhat in line with a multiple compression in the broader market. However, strong earnings reports so far in 2022 do point to a growing opportunity in this once-expensive sector.

Solid earnings reports mean tech companies have new value

Learmonth was quick to emphasize that the allegories to the ‘90s tech bubble have very little bearing in today’s tech sector. While valuations seemed high in 2021, they were not nearly at the multiples above the broader market that we saw in the late ‘90s. That is especially true in the large-cap technology space that the Harvest Tech Achievers Growth & Income ETF (HTA:TSX) is focused on. While some more speculative tech companies are struggling on a more fundamental level, companies that lead this industry continue to post strong earnings numbers. Moreover, many of them have been paying consistent dividends to shareholders or buying back shares to increase shareholder value. In the ‘90s, tech companies were wanton stock issuers. Now, leading tech companies behave like the established, market-leading companies they are.

That story varies slightly across subsectors, Learmonth explained. Software companies were some of the ‘first over the wall’ in predicting slower growth in 2022. Consumer discretionary tech is facing inflationary pressures as consumers cut their spending, too. At the same time, the semiconductor industry has been facing a highly publicized supply chain issue which has impacted their ability to meet surging demand. Companies like Broadcom (HTA holding) report orders stretching into mid-2023, pointing to a bullish outlook for semiconductors.

The tech sector clearly faces a multifaceted and complex set of reasons for its recent pullback. However, leading tech companies continue to post earnings growth at rates relatively above the broader market rates. This recent pullback has brought their valuations closer to the broader market, meaning there is an opportunity for investors to participate in the upside due to be captured by large-cap tech as this essential sector makes its presence felt once again.

“These companies, particularly in the large cap index, are profitable companies,” Learmonth said. “Apple is making more money on the bottom line than most companies make on the top line. These companies are very profitable. Lots of margin. And they’ve increasingly been paying dividends, they’ve been returning cash to shareholders in the form of stock buybacks for years. These are established giants with growth prospects.”

For more on Harvest Equity Income ETFs click here.

Quoted in this article

James Learmonth, CFA

By James Learmonth, CFA

Senior Portfolio Manager
Harvest ETFs

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