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Slowdown Or Reacceleration? -Breaking

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By Daniel Shvartsman

The market has been led by the tech sector for a lot of the past decade. And the recent pandemic only added to that tendency. This pattern was slightly hampered by the pandemic in 2021. As of market close December 28th, the Nasdaq (23.2%) trailed the S&P 500 Index (29.2%) and was about slightly ahead of the (21.1%) on a total return basis year to date. Although the Nasdaq is expected to finish in double-digits, the rally at year’s end has pushed it past 20%, that still represents a significant drop from the 45% total return for 2020. This, however, is more than the peer indices. Underneath the surface, the action in the tech sector has been a lot more volatile, as early year speculation in SPACs and newly public companies gave way to selling off “pandemic winners”, as their forward growth looks much foggier.

As the end-of-the-year period has made clear, we’re entering a different environment, one of inflation and potential rate hikes on the one hand, and of continued pandemic-related twists on the other hand, including even the possibility that (one can hope) it has finally faded to being a background issue. It will not only be difficult to prevent but it also make it hard to forecast the secondary and immediate effects tech has on consumer spending, supply chain disruptions, software adoption and other areas.

These are the five trends to be on your radar in technology in 2022. As of December 28th at midnight, all figures are accurate.

1. Are Semiconductors No Longer Cyclical?

2021 was all about the semiconductors, whereas 2020 had software developers leading the sector. Nvidia, NASDAQ:), more than doubled in value, and became the largest semiconductor company worldwide. Meanwhile, the iShares Semiconductor ETF NASDAQ: grew 45%. Logjams have been caused by supply chain challenges, which are designed to maximize efficiency and minimize redundancy.

The boom is possible due to high demand, which can be driven by the increased electronification in cars and the internet of Things. Supply constraints and supply limitations also suggest that the boom could continue. “Longer-term secular trends are driving the semiconductor and wafer fab equipment markets structurally higher,” is how leading semiconductor equipment provider Applied Materials’ (NASDAQ:) CEO Gary Dickerson put it. Semiconductors have been notoriously cyclical in the past, so the question is whether the increased capacity leads to an overbuild environment or is just enough to keep up with demand; if it’s the latter, semiconductors could continue to soar.

2. Software Slowdown – Is this a new normal?

Software players were among the hardest hit in 2021, as the enormous pandemic-fueled growth rates they posted a year ago couldn’t be sustained. The stock fell 45% from its highs and was up 5% this year. However, Zoom (NASDAQ:), which continues to outperform and increase, saw slowing billing growth that foretold less exciting times. That’s just the headline example, and while there are stocks which bucked the trend, many of the top software sector performers are SaaS 1.0 names like Oracle (NYSE:) or Teradata (NYSE:).

Investors should be able to see the outlook for 2023 and 2022 in order to determine if a new normal will result in re-accelerating growth or if expectations must be reset following the boom years of the early pandemic. With higher interest rates possible and a renewed focus to profitability the sector will be under increasing pressure.

3. What’s The Use Of Attention Economy?

In 2021, social media was another area that would struggle. Many of its peers also fell with it. Pinterest (NYSE 🙂 Roku (NASDAQ:) was the best example of the pullback in these industries, with over 30% declines for the year and more that 50% drop from their highs. However it spread to more names like Spotify (NYSE;), Twitter (NYSE :), Snap (NYSE :).

However, longer-term trends like advertising dollars or content subscription dollars shifting online are not changing. Moves like AT&T’s (NYSE:) spin-offWarner Media merging with Discovery (NASDAQ) highlights the importance of scale within the media industry. reportThis is PayPal Holdings Inc (NASDAQ:) (unconsummated) interest in Pinterest is just an example of the potential consolidation/strategic value in companies that capture consumers’ attention. So the question is where users’ attention goes, and whose investors benefit from it.

4. Continued FAANMG Dominance

The market’s overall performance was dependent on the leading companies around the globe. Alphabet and Microsoft (NASDAQ;) dominated the market, with Apple (NASDAQ.) and Meta Platforms. Facebook (NASDAQ :)), Netflix(NASDAQ:), and Amazon [NASDAQ:] all came in green. The latter two were the only ones that trailed the larger indices. They managed to evade antitrust scrutiny as well as the difficulties of being large by posting impressive profit growth and outperforming their industry. And for all that, there’s an argument at least in some cases that the valuation is not crazy, whether it’s Meta’s 25x EV/free cash flow multiple or Alphabet’s 27.75x multiple. FAANMG will continue to monitor rate sensitive names as they are hit.

5. M&A Revival

Increased acquisitions of tech companies might come from a changing, slower environment. Slack was acquired by Salesforce (NYSE) in 2020, while AMD (NASDAQ) bought Xilinx. 2021 saw a slower pace. Microsoft bought Nuance Communications Inc (NASDAQ): several data-center-related deals went through, but 2021 tech M&A was more about deals that didn’t happen: Zoom dropping its bidFor Five9 (NASDAQ): The Pinterest/Paypal discussions not coming to fruition and, most importantly, continued scrutiny for Nvidia’s planned takeover of Arm Holdings.

While antitrust concerns might stay the buying habits of some of the giants, a slower growth and still low rate environment could lead to renewed M&A action. It could be in the media or software sectors, which have a lot of competition. The latest news from Oracle in the final weeks of 2021 buying Cerner (NASDAQ:), the starting gun for tech M&A in 2022 may have been fired.

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