Making Markets EP35: Tech Continues to Outperform, but the Market Doesn’t Care
by Daniel Newman | May 9, 2022

In this episode of Making Markets, host Daniel Newman explores the fallout after a large swath of the tech industry finishes reporting. With interest rates on the rise and inflation out of control, the negative macros are weighing much heavier on tech names than the positive ones. Dive into this episode for a look at AMD, Lattice Semiconductor, and Twilio results this week, and thoughts on where we are in the continued tech sell-off that is now in its sixth month.

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Daniel Newman: Another week of strong earnings from tech companies, including Lattice Semiconductor, Twilio, and AMD. However, the selling pressure is mounting as the 10 year rose above 3% and the FOMC 50 basis point rate hike didn’t end inflation lows among investors. A look at the earnings results and some thoughts on the economy at large, tech will continue to surprise as chip makers keep beating and raising guidance, but not all tech is created equal. And we are at the point where the fear is so big that we may see a change in directions from the market, or will we? All this and more on this week’s Making Markets.

Announcer: This is the Making Markets podcast brought to you by Futurum Research. We bring you top executives from the world’s most exciting technology companies bridging the gap between strategy, markets, innovation and the companies featured on the show. The Making Markets podcast is for information and entertainment purposes only, please do not take anything reflected in this show as investment advice. Now, your host, principal analyst and founding partner of Futurum Research, Daniel Newman.

Daniel Newman: Hey everybody, we are back, episode 35 of Making Markets. It’s been a crazy few weeks, a lot of time on the road, a lot of earnings, and I have not had the time to sit down that I would like with some of our friends and CEOs that are normally guests here on the show, so it’s been a little bit more me monologing, kind of sharing my thoughts. However, the good news is we have a pretty killer lineup of CEOs that will be joining the show over the next few weeks, months, and so keep your eye out for those episodes. But meanwhile, just because the interviews haven’t been coming through as rapidly as I would like, doesn’t mean the market isn’t on skis or stilts or something, because it has been crazy.

The last few days we saw a Fed induced rally followed by a massive sell off that basically wiped out all of the rally that was in response to this past week’s FOMC meeting, where the Fed decided to raise rates by the 50 basis points that everybody expected, so no surprises there. And the market seemed to be really satisfied by that because what had been a selloff that had been followed by a selloff yielded a really quick jump in tech names all bouncing really hard after the announcements from the Fed chair, Jerome Powell. However, not one day later, all those gains were wiped out. And then Friday was a volatile day with more selling, although a little bit of comeback towards the end of the day. We’re also seeing crypto fall hard.

And basically if you are in growth right now, or you have stuck with growth from the last six months, you are probably feeling the squeeze. Of course, what I always try to say is, you got to look at the fundamentals of the company, you got to look at how they’re performing, you got to look at the business, because we have had a couple of different factors, the huge amount of liquidity and the accommodated Fed environment that we had since COVID to now yielded a massive rise in tech names, many tech names going to 50, 100 or more times forward earnings, which of course tends to be a little overpriced. And so when the market is a little frothy, there’s always that possibility of a turn in a sell. Now we’ve seen the opposite, we’ve seen selling, selling, selling to the point where you just start to look at some of these names and you wonder how is it possible that they have come back so far.

Now, depending on where you are, if you’re a very passive investor or you’re just kind of watching from afar and you’re keeping your eyes on the indices, you’re looking at the Microsofts, Amazons, Googles, Alphabet, you might have looked, at least up to about a month ago, and said, “Oh, everything’s hanging in there, we weren’t that far from the all time highs of last November, the market looks okay, we’re doing well. We’re hanging in there.” Of course, over the last few weeks we’ve seen names like Apple, Amazon missed in earnings, which was one of the few, but we saw Apple have a great quarter and that they’re still down. Alphabet had a really good quarter, missed by a bit, sold out pretty hard. And overall, chip makers, just a whole bunch of companies, Qualcomm, AMD this week, and we’ll talk more about that, had a great result. But where the market seems to be somewhat indifferent towards these companies right now is it’s like a force field around these things and that force field’s saying, “Don’t buy me.” At least, that’s what it feels like.

And so, what’s going on? Well, first and foremost, I wrote an OP ED in MarketWatch this past week and I was kind of looking at this, because in looking at all the earnings and you’ve got good, you’ve got bad and you’ve got ugly, and now over the last several quarters, it seemed like all tech was good all the time, everyone had great earnings. This quarter has been a little bit different, but with six straight months of tech selling off, now going into multiple weeks of really hard selling across all names, including some of the biggest names, you start to wonder, “Well, how far down can this go? Are there good companies, good bastions of any type of company in tech right now, and places to be looking at positively?”

And trying to read between the lines, and long as short is that, yes. I mean, you saw record results from companies like Qualcomm, you saw horrific results from Apple, Alphabet’s advertising numbers are strong. You’ve seen some tech names that have been absolutely destroyed in terms of their price, where now you’re starting to look at them and say, “Are they cheap on a relative value basis?” And the answer is, maybe. We don’t really know, because again, if anybody really knows where the bottom is, they’re going to be in really good shape.

Now, what we do know is Berkshire Hathaway and Warren Buffett, and Charlie Munger had their meeting a few weeks ago and they’re net buyers, they’re buying and they’re investing, which is often a good indicator that there’s a bit of a turn in sentiment, or at the very least what we know is that they’ve always believed in picking great companies, buying in a big way and sticking with them. But yeah, we’ve got so many other macro factors going on. You’ve got the Tesla deal with the Elon Musk and the Twitter, but overall, after reflecting on a handful of 20, 25 different tech earnings, the vast majority of them are pretty good, so what’s the disconnect?

Well, first of all, if you heard me, and I’ve probably talked about this in some capacity over the last couple of shows, but over the last six months there’s been a very strong selling pressure in tech. So this isn’t something that’s just started, despite the fact that the indices are really only starting to fall, which has created this worst first four months of pretty much the markets in, I don’t know, I think I heard it was 80 years, but it’s been a long time since we’ve had a market this bearish for this long. And of course, tech names weighing so heavily in all the composites and all the indices, when they suddenly get pulled down, they pull down everything with them.

Now some stats that I saw come across this past week were, since November, since the all time highs, NASDAQ names, it’s something like 50% are down by 50% or more around, and again, I’m just ball parking because it’s like 22% are down by 75%, and then there’s a small percentage that are down by 90%. So after last year’s run up, everything from SPACS to growth names, companies making money, not making money, going up, up, up, up. And so now we’ve hit this point where we are back looking at fundamentals, but I’m not even sure we’re really looking at that right now. It seems the sentiment is really pulling all the weight on the market and just dragging everything down with it. And so, no matter kind of where you stand, you’re either going to have to kind of hang in there, close your eyes and hope to see some turn or you need to watch what’s going on in the market. And what I will say is, look for companies that are performing well and then look for indicators that the market is strong. And so I spent a little time doing that.

So, as a reminder, I don’t think anyone really needs to tell, but there are some factors in the economy that are very good and there’s some factors in the economy that are very bad. Some of the good ones are, we have a very low unemployment rate and the jobs number that came out this past week looked good. You’re seeing obviously that there’s a lot of employment opportunities. We are nearing full employment. That’s a good thing. The earnings numbers, like I said, are pretty good. Seeing companies like Microsoft, companies like Apple, Qualcomm performing well, chip makers performing well, enterprise software companies performing well. And even on the outside, some consumer tech, and even gaming performing well within some companies. So while I do think that some of the discretionary consumer spend could get pulled back sooner than the enterprise tech spend, which is more deflationary, those are some good indicators.

There are some indicators and some economists out there that are saying that we may have hit peak inflation, and that’s good. If the number comes down, we’re going to start to see that these rate hikes that are going on each Fed meeting are doing what they’re supposed to be, and that would be a good indicator. But we also have some bad, we have some asset bubbles. These are problematic. In many places real estate has gone up probably too far, too fast, and likely to pull back. As interest rates rise, consumer ability to purchase homes at prices with higher interest rates are going to get harder, credit card debt, all the things with interest rates rising are going to be a challenge. Of course, I’m trying to figure out how our government’s going to pay their debt, because there’s a huge one and higher rates mean a higher rate for that as well. But that’s another problem for another day, I’m not going to solve that one here.

Other challenges, of course, we have the high inflation, we have a labor market that’s complicated, so you have the benefit of low unemployment, but you also have very tight labor, which is creating challenges. Companies like Amazon in their last earnings that talked about, basically staffing. They’ve been running these facilities, these fulfillment centers at peak employment and staff, they’ve had to raise costs, they had to spend more money to be more competitive, that takes down potentially margins, earnings. So those are things that everyone’s going to have to watch.

So we’ve got a lot of different factors, of course the war lingering on in Ukraine and Russia hat hasn’t been solved, which has caused a surge in prices for oil, a surge in prices for some other goods, groceries, staples have gotten very expensive, this is all driven by inflation. Will interest rates going up fix this and will fix it fast? Because, well, it’s destroying 401ks in many cases by bringing down the values, temporarily, right? Because if you don’t sell, you don’t lose you. You lose when you sell. And ideally over time, markets ebb and flow. But you’re seeing that come down, you’re going to likely see house values come down. You’re going to see the values of people’s cars, assets, other things come down. So that’s all going to be the effect of beating inflation. But again, you can’t run the economy this hot for this long without consequences. So these are kind of all the things that are going on. It’s a big, complicated story. The economics of it are very complex.

But what we do know is the market has largely said tech had its run, now tech needs to come down. We’ve also seen crypto, interestingly, not acting as much of a hedge. Bitcoins fallen off hard this past week, so has Ethereum, Solana, and other names in the space. So those aren’t necessarily proving to be any sort of hedge against inflation either.

But you know what, this week earnings looked pretty good. And so just a couple of maybe touch points on what happened this week, because, as I mentioned, over the last few weeks I’ve covered here Apple, good, Microsoft, good, Alphabet, pretty good, Qualcomm, excellent. And now TSMC on the chip side, so I’ve talked a lot about what that means. If chips are strong, especially for data center enterprise, it means that companies are spending money on tech, which is good. So there was a lot of good indicators. Of course there were some tougher earnings results. I mentioned Amazon, Amazon with its Rivian write down, some unexpected expenses, some slow down due to more mobility. That number probably surprised and spooked some investors over the last few weeks.

But this week we had a few that I was tracking, AMD, first of all, had its earnings and just had an absolute blowout quarter, 117% earnings growth. It had a 71% revenue growth. It came near six billion dollars, even without Xilinx, it had a terrific quarter. Its strength was across the business, it wasn’t any one place. The PCs, which like I said, I think is going to be one of the areas that could likely pull back in a tighter economy, still saw 33% growth, its sequential growth. And then in the data center, which is where I’m really saying the business is going to stay strong and be strong, at 88% growth, two and a half billion. And it servers and sales are great, so that means cloud scale, that means enterprise, that meets data center, very, very strong results. So yes, Lisa Su, she’s been operating and executing extremely well and those results are speaking for themselves.

It’s not just the red hot companies by name, it’s also some smaller chip makers. So as chip makers strength to me indicates larger tech strength because every bit of tech runs on chips. So Lattice Semiconductor, not as well known, but one of the leaders in the market in low power FPGAs, saw 30% growth on a year over year basis, it saw 6% sequential growth. It saw its margin increase. It saw its net income increased by over 70% this quarter. It saw growth across all of its markets. It saw its compute and communications business grow, so 5G and data center. It’s industrial automotive, so industry for manufacturing, automotive about 40%, huge results. And even its consumer numbers did really well, up 19%.

Now this is, again, showing the demand for semiconductors, the demand across many secular trends, 5G, AI, compute, automotive comms. So all the different spaces are actually performing well, so despite all the kind of doom and gloom about the market, the actual earnings results of companies continue to do pretty well.

And then on top of that another company I looked at and we looked closely at was Twilio. And Twilio is a company that does customer engagement platforms. They do messaging to customers, communications. A well known, was it Darling, it rose really fast in the tech boom of the pandemic. Saw its stock hit almost 400, it’s now at 100 or so, it’s roughly at 100. The company’s still not profitable, but it actually on an adjusted basis came close to breaking even, but it grew 48%. It’s now at 875 million in revenues. And it’s narrowing its losses, it’s continuing to expand, and the demand for automation, CX, communications, these kinds of platforms, are going to continue to perform strongly. This is the future of how customers are going to engage with brands. It’s going to be digital and it’s going to be a well utilized platform that has a strong developer ecosystem like Twilio. So its numbers were really good.

And then, like I said, over the past weeks, we’ve seen similar results in other enterprise type software. We saw Five9 perform really well. We saw Microsoft’s Enterprise software performing really well. ServiceNow was another company that I spent some time talking about that had an absolutely outsized result, and I expect… By the way, the CEO, Bill McDermott, will join me on the show probably within the next month or so, so I’m excited to have that conversation with Bill.

So, largely the earnings are doing really good, and that’s notable. Now, again, the challenge of all this is when you have performance and then you have performance and then you have the economy and the way that tech is being sort of demonized right now, it may or may not matter how they’re performing. But a lot of this kind of fits the debate in the market between Cathie Wood and basically everybody that’s invested in her funds that are all losing their minds right now. And she’s got a longer term thesis, which seems to be playing out here is that tech is deflationary, I’ve been saying this a lot, that the demand for tech will stay strong even as the economics maybe pull back during this current juncture of more of a bearish, low growth economy that we’re dealing with.

She actually tweeted something about Zoom today, and it was interesting. She said, “A nay-sayer lumped Zoom into profit-less tech. Concept capital, stay at home stocks, along with Microsoft, we believe Zoom will be a prime beneficiary of the first rip and replace cycle since the early nineties in the 1.5 trillion global enterprise com space.” Now, again, that’s her thesis, she’s long on Zoom. I don’t have a position on Zoom, we advise the company. What I can say is if you look at Zoom’s results over the last several quarters, they’ve performed really well. They’ve got a strong cash position. They have a strong margin, they have a strong revenue growth. They have a strong net revenue expansion. So the market, the demand is doing well for the company. Now their next earnings are coming up, it’ll be something else to look at closely in how they’ve continue to grow as the pandemic has subsided.

But again, this is just one example of kind of the disconnect that Zoom has seen in stock fall 70 plus percent. But at the same time, the business is actually growing revenues, customers, net revenues, margins, platforms, products, solutions. And so it’s hard to say whether it’s a Twilio or a Zoom or ServiceNow or Splunk or Qualcomm, are they, after all this additional growth, really worth less than what they were worth before? And I think the natural thing, if it was a private company and they were growing at these rates and building the balance sheets and expanding the customers, they would theoretically be growing in value.

Now there are some different equations for how you discount the value of growth during times of an interest rate environment with where it’s increasing. And so I’ve heard things like 15% per 100 bits or per 1% interest rate of the value of the enterprise can be adjusted down somewhere around 15%, but that’s not a hard and fast number, that can vary, but it is something to keep in mind.

The long and short though is, the earning is strong, the demand for tech is strong. It’s deflationary in many ways, especially in the enterprise. The most likely culprit or where tech might season pullback is going to be in the discretionary areas. If there’s less liquidity, no stimulus, we may not see as much spend on things like, “Will we upgrade our next phone?” Especially lower-end devices, PC [inaudible], personal PC purchases, maybe some gaming consoles. But even those, you got to look at with this demand so high and the supply still be constrained because supply chain issues are still looming, I don’t know if this in fact will become a problem because if demand stays high enough and the Fed doesn’t intentionally destroy demand, which is something Powell said that’s not their intent, then the market may in fact be stronger, even though all this selling is going on.

So it’s complex times. It’s a little hard to watch. It’s hard to understand if you’re watching from afar, these companies that seem to be doing well and why everything’s pulling back. But the external factor of sentiment, a lot of things that have nothing to do with the way a business performs can weigh heavily on how the business is valued by the market. And the markets are very fluid, they’re very dynamic and so that value in those prices can change quickly.

We tend to be encouraged that tech in the long run will continue to stay strong and will remain growth oriented, and especially in those areas that I mentioned for now, with the demand for these and for the emerging trends, things like Metaverse, 5G, AI, ML, data, analytics, SaaS, these things are all trends that will continue forward. They’re going to continue to be invested in to make businesses faster, that can drive next generation consumer experiences.

So despite how the market is performing, it probably is worth taking some time to look at how these businesses are performing, look at these companies and understand that largely they’re performing quite well and that tech is going to stay hot. And even though all these people are popping on right now and saying, “Invest in oil, and invest in value, invest in cyclicals,” just remember that five months ago in October and November, everyone was jumping on saying invest in tech. So we tend to be great at telling people to jump into things when they’re already hot, like housing, cars, oil stocks, and now that tech is cold no one’s going to say to buy it, and that’s where people like Buffett and some of the smartest investors I think do really well. And again, I’m not here to tell people what to invest in, but this is just some of my observations. So there you have it, a crazy week, another week ahead. See you all soon.

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About the Author

Daniel Newman is the Chief Analyst of Futurum Research and the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise. Read Full Bio