Big Tech at 2022 Lows. Any Bargains?

With the Fed expected to keep tightening despite worries of a recession, is there a bottom for tech stocks in sight or more pain to come?

A rock and a hard place

Higher rates punish companies with higher P/E ratios, which is the case for most tech stocks. But tech firms often have advantages in inflationary scenarios. Quick cash turnaround means they see less deterioration in liquid assets. High gearing typically translates into a net benefit as the principle of the loan is eroded by inflation. High margins allow for more flexibility with pricing. And high demand or captive markets help pass increased costs on to customers.

Google's AdSense model, which supports most of the firm's revenue, is based on real-time auctioning of advertising space. There is no fixed price for revenue, and it adjusts automatically for demand. If prices in the market are rising, then google's algorithms will automatically compensate, implying increased revenue for the company.

USD headwinds

There are a couple of significant downsides for tech stocks, mainly the advertiser-driven ones like google. Tech firms are global or aspire to be global. The strong dollar is throwing up considerable currency headwinds in the current environment. Many tech firms make most of their money overseas, and with the dollar index near two decade highs, foreign profit will be discounted.

The other issue is advertising revenue. As companies are faced with financial difficulties, advertising budgets are often the first to be cut. Advertising was forecast at the end of last quarter to rise 8.3% this year. But next year, growth was expected to slow down. After two quarters of negative growth and the Fed is forecasting just 0.3% growth for this quarter, maybe those projections for advertising growth will be revised.

Tech sentiment remains bearish

Key takeaways

Tech firms typically have advantages over other sectors in inflationary scenarios, such as quick cash turnaround and flexibility with pricing, and can pass increased costs on to consumers. But with the Fed expected to keep tightening, the bottom might not be in yet.

Some downsides for advertiser-driven stocks like Google include the strong dollar and cuts in advertising revenues due to slower growth. But tech stocks, being more popular, are usually ahead of the markets, so risks are more priced in than the other indices.