We’ve all seen the headlines:
“Microsoft Falls After Earnings.”
“Tech Stocks Lead Market Retreat Ahead of Latest Earnings.”
“Tech Industry Sees Tough Road Ahead as Wave of Layoffs Spread.”
It spells out a lot of doom and gloom for tech stocks that were once the darlings of the market.
I’m not suggesting these headlines are wrong.
But I believe there is one mega trend in the tech sector that will not only survive this tech bust … but thrive in the aftermath.
I’ll share which one. But first, I want to tell you about the pain ahead for the tech industry.
Earnings Paint Gloomy Picture for Tech
I recently talked with my good friend and colleague Mike Carr about tech earnings.
Pro tip: You can check out Mike’s Chart of the Day here on Money & Markets.
Earnings season has just begun, but tech is already feeling some pain.
Tuesday, Microsoft Corp. (Nasdaq: MSFT) beat earnings estimates, but shares dropped 2% after the company provided lackluster guidance for the quarters ahead.
And things are not likely to get better for tech this quarter:
This chart shows the expected fourth-quarter 2022 earnings for the 11 major sectors of the S&P 500.
FactSet expects earnings growth of the information technology sector to be 9.8% lower than a year ago.
Revenue growth is expected to be 0.6% lower.
For context, both of those expectations are worse than they were even a month ago.
It means tech earnings are only going lower…
And the communication services sector is in even more trouble.
Companies in that sector are expected to report an earnings decline of 20.1% compared to the same quarter a year ago. Alphabet (aka Google) could report a 21% drop in earnings while Meta could drop 40% … or more. We’ll find out next week.
So the idea that there is more pain in store for the tech sector isn’t wrong.
These earnings projections coupled with massive layoffs in Silicon Valley spell a rough road ahead.
And cash is harder to come by for these tech companies due to higher interest rates. That not only impacts the bottom line but the stock price.
But I think there is a silver lining … better yet … a sector within tech that will come out the other side of this even stronger than before.
Party Like It’s 2007 With Artificial Intelligence
I remember 2007.
I was working for a daily newspaper in Southeast Kansas.
In late June of that year, Apple Inc. (Nasdaq: AAPL) transformed how we communicated with the launch of the first iPhone.
It was the tech giant’s first smartphone — complete with a touchscreen and what felt like unlimited potential.
The iPhone was a computer in your pocket.
Today, another tech innovation has grabbed our attention unlike anything we’ve seen since 2007… ChatGPT.
ChatGPT is powered by artificial intelligence (AI). The site allows users to interact with a bot to create everything from research papers to recipes.
This generative AI — a program that uses algorithms to create new content —grabbed headlines after passing the three medical exams that all prospective doctors are required to take. And ChatGPT didn’t have to study for years on end!
Microsoft is investing billions of dollars into the company behind this revolutionary bot: OpenAI.
ChatGPT shows that AI is capable of handling complex tasks more efficiently than humans … and there is big money in the market.
This has given some solid footing to AI-related stocks in a market where broader tech stocks continue to struggle:
The chart above shows the performance of the iShares Robotics & Artificial Intelligence ETF (NYSE: IRBO). The exchange-traded fund (ETF) invests in companies operating in artificial intelligence, software research and robotics tech.
Over the last year, the ETF is down 16%, but I want to highlight how the stock has performed in the last three months.
As you can see, IRBO has climbed 21.1% while the Technology Select Sector SPDR Fund ETF (NYSE: XLK) has only risen 7%.
This tells me there is an appetite for AI stocks amid the excitement generated by ChatGPT and other innovations — all while tech stocks on the whole are getting hammered.
And IRBO is just one ETF that gives exposure to AI. Here are a few others and their performance over the last three months:
- Robo Global Artificial Intelligence ETF (NYSE: THNQ): +13.2%.
- Qraft AI-Enhanced U.S. Next Value ETF (NYSE: NVQ): +5.1%.
- WisdomTree Artificial Intelligence UCITS ETF (BATS: WTAI): +12.8%.
There’s little doubt tech stocks are struggling now … and will continue for the foreseeable future.
I’ve shared a few different ways to get in on the AI mega trend, as I believe it is one that will not only survive this tech downturn, but come out on the other side stronger than before.
For reference: AAPL stock is up 3,754% since the launch of the first iPhone in 2007.
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Matt Clark, CMSA®
Research Analyst, Money & Markets