In this episode of Making Markets, we look at the upcoming earnings season and a plethora of macroeconomic forces that are dragging markets and compressing tech valuation. While earnings look to be good, and the biggest names should weather the storm nicely, more speculative names have been obliterated. How low can it go? What is ahead? How will inflation and interest rate hikes impact the next few months? With Nasdaq off to its worst start since the 2008 crash, 2022 is setting up to be a wild ride.
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Transcript:
Daniel Newman: The sky is falling, or is it? The Nasdaq is off to its worst start since 2008, tensions are on the rise in China and Ukraine, inflation is spiraling out of control, and a more hawkish Fed is planning to hike rates and taper QE, with the possibility of shedding assets in 2022. Crypto is in free fall, as Bitcoin falls to nearly half of its 2021 highs, tech names have been in decline since November, as the Fed Omicron inflation in a rising 10 year, all concern investors. Can tech earnings this quarter save the day? We look at 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 company’s 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, welcome to another week of Making Markets, episode 21. Daniel Newman here, your host as always here on Making Markets back for, actually, the first recording done in 2022. If you haven’t had a chance to tune in yet, we did publish last week our recent episode, where I flew out to Charlotte to sit down with the Honeywell CEO, Darius Adamczyk. This was done right before the holidays and while, at that point things were looking a little bit grim, we have seen the markets turn for the worse and here we are heading into the first big wave of tech earnings for 2022 with so much uncertainty around us.
So you can see I’m wearing all black. It’s not a funeral. It just feels that way because the sky feels like it’s falling and that is amalgamation of different things. We’ve got pending interest rate hikes starting in March, we’ve got somewhat out of control inflation. There’s definitely some different schools of thought there. We’ve got stalled legislation, the Build Back Better bill seems to be going nowhere, and there seemed to be some very good things in that bill and maybe some things that didn’t need to be in that bill, but as usual, Democrats and Republicans are not working together and therefore the stimulus there is not going to be pushed through. So you’ve got all kinds of different factors there and what we’re starting to see is the market capitulate a little bit. Now, let’s be frank here, the media is really just starting to talk about the markets crashing, but the fact of the matter is, is that the pull back has been happening for some time. It really all began with Omicron right around Thanksgiving. And that’s when you start to see the tech names start to fall.
Now, again, there’s two schools of thought here. You’ve got the indices, which are the Dow Jones and the NASDAQ and the S&P, and those, as of mid-November, were pretty much at all time highs. Having said that, throughout November, after Thanksgiving, December and into January now, we’ve seen those pull back in a big way, but like the NASDAQ, just for instance, it’s a weighted average and it’s weighted heavily towards the biggest name. So while you’re just starting to see it pull into what’s considered correction territory, which is a fall of greater than 10% from the high, that isn’t necessarily an indicator of how the overall markets are doing. Tech as a whole, speculative investments, crypto, all of the which are down in a big way.
Let’s talk about that for a minute. Let’s talk about crypto. In the past seven days, we’re seeing Ethereum fall by 28%. We’re seeing Cardano fall 18%, Solana fall 38% and Bitcoin now is down 50% from its high and it seems to continue to be falling. So, one thing that we do know for sure is the whole hedge against inflation being crypto seems to not be the case. Now, crypto’s a super speculative, highly volatile, and even last year when market was somewhat roaring, you have to remember that Bitcoin had a range in the thirties, it hit the thirties and went all the way up to nearly 70,000.
So this isn’t entirely tied to the fall, but you could see as speculative names have fallen, crypto has taken a big turn. So it’s not where people are running with their money, in fact, people are pulling their money out. So, people that made huge gains thought the party might be going on, but it seems that the music over there in the crypto world is fading. Now the question is, can it bounce back? Well, just as fast as it falls, we’ve seen it go up, so I don’t necessarily know that the party is over here, but it is something that we need to watch closely as people that poured money in thought that, “Hey, crypto can only go up”, or that the volatility would be little dips, big rises. We’re seeing that it can also be big dips before the big rises.
So, I’m still pretty bullish about the fact that there are some great crypto projects and if you’re in some of the more stable names, I don’t know that it’s reason yet to run away and panic, but if you’re in some of those more speculative, high risk, unknown altcoins, I think that there’s reason to believe some of those may not survive, but we’re going to have to keep an eye on that. So crypto’s just one example.
And then of course you have the big tech names and the more speculative tech names, just did a run through of a couple of companies in the past few months, since the highs. It’s not just something that’s happening to companies that don’t make profits. You listen to people like Jim Cramer, he talks about, “Well, you got to move out of companies that don’t make profits and into big, good stable companies.” And there’s some truth to that. There’s definitely been a rotation to value. I did a recent MarketWatch article where I looked at some of the tech names that are going to withstand the pullback more successfully. And that’s due to low forward P/E numbers, companies like Oracle, companies like HPE. Those are a couple of examples, even IBM, because first of all, they never went up with the rapid rise, but they also have lower P/E ratios, they do make profits and most of them do pay dividends, but at the same time, some very solid, what I would call more growth names, have also been obliterated.
Just in the past couple of months, we’ve seen Adobe drop from its all time high of nearly 700 to just under 500. So you’re seeing a $200 drop in the share price, that’s almost 30% of its value. Nvidia, a name that felt like it could only go up, we’ve seen that fall pretty hard from its highs, it was up to 346 when it peaked out in November, it’s dropped to 243. Zoom over the last almost 13 months has done nothing but fall and it’s not been because of bad results, it’s leveled off and it definitely had some of its growth pulled forward because of the pandemic, but overall, the company still has continued to grow. So it had 300 plus percent growth numbers in ’20 and early ’21. And then the growth over those multi-hundred percent growths have fallen into the 30, 40, 50% range, but that’s still really good growth.
The challenge with a name like that, is a lot of the growth got pulled forward, it’s fallen from 478, it had a forward P/E ratio of over a hundred, now down to 39. If you look at all those names though, one of the commonalities is the compression of P/E ratios is something people said would happen when interest rates rise and there is to some extent what is happening there. The problem is, is there seems to be a lack of confidence that these companies can continue to grow. So that’s the competing forces right now. With Adobe, has over a 40 P/E. Nvidia, even after falling a hundred dollars a share, it’s still sitting at over 70 and Zoom has only fallen to 39. Now let’s contrast these to some of the bigger, more stable names. You got names like Microsoft, Apple, Amazon, Google, Microsoft, and these names are the heavily weighted names.
These are the names that are really propping up the indices, which have only fallen about 13% overall, which means, 401ks are falling, it means index funds are falling in a big way and I’m not just talking about Cathy Wood’s Ark fund, which is down 50%, which is almost shocking when you have something that’s a fund with that much diversification, but it shows that the entire growth sector, so like ARKK, the entire growth sector, everything that’s speculative and growth is shredded, probably an interesting time to just mention a data point, that 50% or so of the NASDAQ companies have fallen 50% from their highs. And that number seems to continue to grow. And by the way, 50% isn’t the most they’re falling, there are plenty of names that have fallen 70, 80%. I look at names like DraftKings that was up at the $70 range has now fallen down to 20.
So you have companies that, of course like DraftKings, that don’t make money yet and by the way, a company I own, falling very far, but it’s hard to believe that a company like that with the type of visibility it has, won’t at some point, make a run back. So back to the big names though, Microsoft has fallen from 350 to about 296, sits at a 33 forward earnings number, P/E ratio. Apple’s probably done the best holding up, only about 10% drop there, it’s P/E ratio sits at 28 though. Amazon has a slightly higher P/E ratio and has taken a bigger fall, 3,700 at the peak 2,800 now, so you’re seeing about a 20% fall and its forward ratios fallen to about 47. And then of course, Google fell from 3000 to 2,600, but actually Alphabets has a pretty low P/E ratio, sitting at around 25 right now, and given its revenue stream, ad streams, cloud, business, diversification, and just the strength it has in the market, that seems to be a pretty accurate place to be.
So we’ve heard a lot about these compressions evaluations and you’re starting to see it. Companies are falling into that more palatable growth number in the high twenties, low thirties and I would not be surprised to see a compression on some of these high flying names all the way back down to around the same number that you’re seeing these more stable companies, but the big point here is that nobody has been able to completely miss this fall. Every company has been pulled back, Friday ended terribly. It looks pretty bleak. The sell off of crypto this weekend has been unnerving to say the least. And of course, everybody’s probably looking at this saying, “well, when is the time to get back in”? Now, the speculation is there’s trillions on the sidelines and I do think you will probably see a hard reversal at some point, but that certainly doesn’t mean we couldn’t see another five or 10% shredded off the indices, maybe more.
Of course, you got people like Grantham calling for almost an apocalypse and I guess if you call for one every six to 12 months, you’d probably get one eventually and that’ll make you Nostradamus. But all joking aside, we knew the market was running hot. We knew inflation was going to have to be dealt with. This was going to be dealt with through interest rate hikes. The market is clearly reacting very badly to it and so the question mark is, what are the catalysts ahead that could potentially turn this? Now, I’m going to talk about that in a minute, pretty generically, because we’ve got earnings coming up the next few weeks and a lot of people are wondering what is going to happen and while of course, I don’t know specifically, I have some speculation, I’m going to share that. But before I do that, I just want to talk about what these macro trends really mean.
We’re sitting in a situation right now where, I’ve mentioned the markets are in turmoil, you’ve got a fear of inflation. We’ve got overpriced housing. Housing went up 20% around the country and in much more in certain places, but it’s also, it’s milk, it’s eggs, it’s cheese, it’s grocery items, it’s store shelves that are still bearing. Interest rate is supposed to help suppress those prices, but of course you’ve got competing forces there as well. So in order to bring down prices on items. So we’ve got cars, used cars, overpriced, of course, this is partially caused by not having the supply chain in order, GPUs and gaming consoles, phones, TVs, a lot of stuff overpriced because we couldn’t get supplies. So part of the solution to getting the inflation down is getting supply up.
That’s going to take some time, because demand is state high and we still haven’t fixed a lot of these issues. This week, Intel announced another fab, a mega fab being built in Ohio. This’ll create more capacity, but again, fabs take multiple years. So the fabs going in Arizona and the fabs going in Texas and the fabs going in Ohio, that’s going to take some time and until those are done, we won’t be able to necessarily move back from the meager 12% of chips being produced here to the 37% that we had before and I don’t know that’s the intention, but of course that’s part of the problem. The other part is that, with so much demand and lack of supply, we’ve seen prices go up a ton and the ability to provide supply, supply on houses, supply on automobiles and supply on things, like you said, the barren shelves at grocery store, how are we solving this?
Well, of course you push interest rates higher and interest rates going up means it slows down price growth and so the other things that need to happen of course, is wages need to rise so that people can afford things and then concurrently, of course, you have the impact of higher rates. So who benefits from higher rates? Well, cost of goods, people who buy stuff should benefit and that’s going to be something to watch, but if you have cars, an average new car is 40 or $50,000, bringing it down five or 10%, probably isn’t going to make a huge difference, especially if you’re going to drive rates up to one to 2% in terms of what people can borrow. You look at mortgages on a home or a five or six or seven year car note.
If the rate is one or two or 3% higher, that can be very significant and a five or 10% reduction in price may not be enough. And so a lot of people are worried about that. So if you bring up interest in inflation and doesn’t bring prices down significantly enough, that’s a problem, but the other problem is a lot of people’s net worth is tied up in their assets. So you bring up interest rates, you bring down the value of goods, and then you have the risk that you’ve actually caused a lot of homes more harm because you’ve basically taken a lot of their wealth away and now you’re making it more expensive for them to borrow. So interest rates going up means higher student loans, higher credit card payments, higher car loan payments, higher mortgage refinance payments, less equity in homes. So there’s a really careful balance.
And while people have said that the fed is a little bit over their skis, this is why these are just a couple of the things that they of course have to deal with. So we’ve got to bring prices back to earth, to some extent, but at the same time, you can’t push interest rates too much because it not only compresses growth in the stock market and hurts companies and brings down valuations, which means less hiring, it also means less wage increases and at the same time, people can’t afford stuff, so interest rates go up and if the cost of goods don’t come down enough, there hasn’t been enough of equilibrium to actually help the market. So adjusting prices may or may not fix things. Who will really do well? Well, the banks of course will do really well because they raise interest rates. They’re able to charge more.
So if you want to see who will do well and do the best interest rates. Putting your money in a bond, paying 1% or 2% versus 0.5%, none of these are going to be great places to have your money, except when the market’s falling 40 or 50%, I guess, making that and not having your money evaporate on the daily basis might feel better and then of course, we’ve got some other macroeconomic factors. You’ve got the political stall, the Bill Back Better bill, too much in it. We’ve got some really important things like childcare that need to be taken care of, but of course, it’s kind of like this all or nothing thing. Ideally Republicans and Democrats will work together to peel out some of these things, to get stimulus in some of the right areas, to help the people that really need to be helped because again, the left and the right, wanting to show their resolve, of course, pushing towards the 2022 election, where a lot of people are speculating there could be a shift of power.
Nobody wants to act. And again, the people that are really getting hurt are not the people, wealthy people tend to not be the people speculating in markets, it tends to be the ones that always get forgotten and of course that’s who hopefully the politicians should be and are thinking of and taking care of, but I often worry if they are. Okay, so let’s talk about earnings going forward. This is where I want to end this show today, because, obviously you can hear, again, dressed in all black. Why? Because it feels like a funeral. Of course, as someone who invest, speculates, works with big tech, it’s just been such a good ride barring I don’t know the fact that we have a pandemic that still has not been solved yet. We’re already turning, pulling on all kinds of levers to slow the economy.
It’s a little bit scary. I do have some colorful, bright shirts that I can change into because I do deep down in my heart hope that we can get away from any more macro turmoil, but I’m not so confident that we can, but what I do think could be a positive for the market is going to be what we’re going to see over the next four weeks and that’s going to be the earnings in tech. This week we’re going to have IBM, it’s going to kick it off. You got Intel later in the week. These are the first two they tend to start off the tech earning seasons. IBM, it’s going to be interesting to see first post Kyndryl earning spinoff. I don’t have a lot of insight as to where that’s going to go, but my guess, my take is that it’s going to be a very small growth number, but what I’m really going to be looking for is growth in the cloud number.
Intel. This is a huge one. Now Intel has benefited over the last couple months while, they’ve been very aggressively showing their plans to build, to integrate their manufacturing, to not be overly committed to overseas manufacturing. Another macro force that we’re still dealing with is lack of supply and [inaudible] alluded to with the 12% onshore manufacturing of chips versus 37, but at the same time, Intel hasn’t really seen any growth going upwards, despite all of its aggressive endeavors and planning and new process announcements and diversification and huge TAM and that’s largely because there’s been a bit of a confidence crisis of whether or not the company’s actually going to be able to deliver and be able to compete with very ambitious, fabulous manufacturers, Qualcomm, NVIDIA, AMD and others. I do believe ’23 is going to be a bigger year for Intel, but they’ll be coming up.
We’ll be watching. And of course they’ve got that big mobilized spinoff coming this year, which is going to be something else to watch. Now, when you get past these first two, more generally speaking, we’re going to see the Apples, Amazon’s, the Alphabets. We’re going to see AMD. We’re going to see some of these high flying growth names over the next couple of weeks, and these are going to be the ones everyone’s going to watch. Now my take is, you’re going to see some really good results, partially because a lot of this fear and speculation, the FUD that we’ve been getting, and some of it’s been real, is going to probably be more impactful going forward than in arrears. We really only started to make a lot of these decisions in the December timeframe, the tapering of quantitative easing and perhaps even shedding assets off the balance sheet, the raising rates.
So we started to see the impact to that really hard since Thanksgiving timeframe, really into December and into January here. But I don’t believe it’s had any impact on these companies and their businesses, I believe, these companies and their businesses have continued to perform. And I also believe that there’s some deflationary value here in the overall perspective and go to market models of most of these companies, you especially look at companies like Microsoft, Amazon, Alphabet, companies are going to look at technologies that are going to make them more streamlined, they’re going to look at the cloud, they’re going to look at tools for automation. They’re going to look to AI, data analytics services, because if you start to see rising prices for human capital, because we still have a work shortage, despite the fact that we’ve seen wages rise, these companies are going to look for ways to streamline the business.
They’re going to use technology. So that’s where money will go. They’re going to invest further in technology to streamline their businesses, lower certain costs and be able to continue to automate streamline revenue growth. I think the real number to look at though, isn’t going to be so much, how many iPhones did Apple sell and did they beat, how fast did Azure grow or how fast did AWS grow? I actually think those numbers are going to be good. Now again, just my opinion, they’re going to be good, but what I think everybody’s eyeballs are going to be on this quarter is going to be forward guidance is, are these companies still confident that they’re going to keep growing? We’ve had back to back company quarters for companies like Nvidia and Microsoft, where they’ve had record revenue for several years and record growth and will this growth continue and are these CEOs confident in these growth, given all these macro economic circumstances that are impacting the markets.
Microsoft showed an extremely bullish resolve, making a 68.7 billion, all cash offer to buy Activision Blizzard. I actually really liked that, at this time when a company could be getting nervous, looking to hoard cash, looking to slow down spending maybe, become a little bit more of a preservation mode, they’re saying, “nope, full speed ahead.” Satya Nadella has his hand on the wheel and his foot on the gas. And I said that in my most recent MarketWatch op-ed, a lot to like over there, but the guidance is going to be the key factor. We saw this with Netflix this week. Netflix met the top line, beat on the bottom line, came close on subscriber numbers, but their forward looking guidance for subscriber growth was bad.
They admitted the fact that they were seeing other streaming services were starting to eat into their growth and the market absolutely punished them. I mean, it was a 20% fall after even a decent result and I just think this is a great indicator of where we are at with the market right now, the market is not going to put up with anything that looks risky. They’re going to look to move out to other things. And like I said, until these valuations compress, these P/E earnings ratios come down and these companies can show how they’re going to grow, the money may rotate out. Now some of these names, like I said, that have already seen 60, 70, 80% falls, they’re going to start to maybe look more attractive and they’re going to start to look at good re-entry points. So of course all that money on the sideline may have an opportunity to work.
I think the key here though, is understanding that tech is bullish. Overall, the sentiment of tech should be good. The desire, demand and need for companies to invest in a lot of these enterprise technologies, the utilization of social media, of handheld and mobile devices, the desire for AI, this is all still there. It’s heavily weighted. It’s the same in fintech. People want to see better apps, better tools, another company that I’m in, SoFi, I got their bank charter this week. So now you’ve got a SoFi technologies with a bank charter with SoFi money. And you’re seeing that names like this have the potential to be more disruptive and so fintech is strong. Of course, you’re seeing a lot of interest in healthcare, but we’ve also seen companies like Moderna, Novavax, have had huge valuation compressions over the past several months as people don’t, I guess, see the fact that the future wave for all these vaccines, it’s no longer at the center, they’re rotating out of this.
And that’s why you’ve seen huge, almost halving in their values. So this is the circumstance, the situation that’s going on. I think if these companies can come out and say, they’re confident into the future, positive guidance, they’ve got the right platforms, the right growth, the right strategy, I think the market may, to some extent, be favorable towards those companies. If companies start coming out though with nervy, halting their confidence towards the long run, this could be a very bearish sign. It could be very negative for these companies, even if the results this quarter were really good. So that’s it, all in a breath. I barely took a breath here, but back into a new year, a lot going on, we’re heading into this tech earning season, it’s going to be a big one for the markets.
I do believe it’ll be a good one in terms of this quarter’s results. I just wonder what these companies are going to say going forward, I’m crossing my fingers that they’re positive, sentiment remains good, demand for tech stays high and that, to some extent, now that we’ve had a correction, this is the correction and we’re coming towards an end of it, but there’s nothing yet to say we are fully there. It’ll also be interesting to see how the fed reacts now that we’ve seen so much correction before any actual interest rate hikes have taken place, but I’m going to leave you there. You got a bunch of great guests that are going to be joining the show over the next few months. So stay tuned with me, hit that subscribe button, join us but for Making Markets and this episode, we out of here.
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Author Information
Daniel is 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.
From the leading edge of AI to global technology policy, Daniel makes the connections between business, people and tech that are required for companies to benefit most from their technology investments. Daniel is a top 5 globally ranked industry analyst and his ideas are regularly cited or shared in television appearances by CNBC, Bloomberg, Wall Street Journal and hundreds of other sites around the world.
A 7x Best-Selling Author including his most recent book “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor.
An MBA and Former Graduate Adjunct Faculty, Daniel is an Austin Texas transplant after 40 years in Chicago. His speaking takes him around the world each year as he shares his vision of the role technology will play in our future.
