Tech is one of the market sectors that has experienced a major repricing in 2022. Anurag Rana, Bloomberg’s senior analyst for the software and IT services spaces, has been observing companies, such as Apple and Adobe, and sees a lot of change happening in the industry. He joins the ETF Think Tank to discuss the tech sector and some of its biggest names.
The discussion begins with Apple in light of the reports that demand for the iPhone 14 is weak. Even though 53% of the company’s revenue comes from the iPhone, Rana sees Apple as having a very stable business model. In his view, people buy new units every 1-3 years, so you have to think of Apple’s business model as a subscription service. The product is just devices instead of information. The business could fluctuate in a recessionary environment, but if Apple can deliver 2-3% revenue growth and 8% earnings growth, that would be solid. Rana notes that the App Store has fueled growth on the services, but there will come a time where this finally stops and long-term growth rates decline to the high single digits.
One of the reasons Rana is positive on Apple is the stickiness of the customer relationship. Once you get used to an Apple product, you are not going to switch. You may delay upgrading to the newest version of a product, but you won’t change. Apple can continue to grow in the 5-10% range based on what they are selling, but it does improve their entire ecosystem. When you upgrade to the latest iPhone, perhaps you upgrade Apple Care or increase cloud storage or get a new pair of AirPods. This relationship helps create more stable free cash flow looking forward.
Is Apple going to build a car? Rana thinks so but has no idea what it will look like. The key question will be what the price point is. He thinks that the company will either build something for mass adoption or something more expensive. Overall, Rana does not think the move makes a lot of sense. If you have a services business with 70% gross margins, why would Apple want to get into a space where Tesla has a 20% gross margin and Ford has 12%? Can the company build a sub-$60,000 car with a 50% gross margin? Rana doesn’t think so, but they may be able to get there with a high end $200,000 car. The question is can you sell enough units to make it worthwhile. Rana would prefer the company spend money developing new shows, acquire NFL rights or something like that.
The next company Rana was asked about was Adobe. While he’s been a fan of the company for a while, he has some questions about some of their recent moves. The acquisition of Figma, he says, looks like a desperation move. To pay $20 billion for an asset that was worth $10 billion at its peak in June proves that they read the market wrong. Their bread and butter is PhotoShop and PDF. You don’t get away from that. Antitrust regulators could have a field day with this because it looks as if they are trying to take out a competitor. It could also be a reflection of their lack of confidence in cash flows. Adobe’s days of growth are long gone.
Other key takeaways:
- Is buying Activision a good strategy for Microsoft? If it closes, it will be a good deal because then they will become the biggest player in the gaming space. Cloud gaming should eventually work and if you can offer a good product on a subscription basis, it can be very good for the business model.
- Does Rana have a favorite in blockchain? It would probably be one of the services companies because they are the ones that are implementing it. Seeing what Accenture, IBM, and InfoSys are doing is probably a good starting point.
- Shopify is a fun story. The problem with all of the pandemic stocks is the massive pull-forward in demand. Now, they are kind of stuck. It could begin to look better sometime in 2023, but what is the long-term growth rate and how do they start taking market share?
- The only thing that matters now in terms of stock valuation is inflation because that will determine the discount rate. If inflation has come down a year from now and the yield on the 10-year is still 3.8%, Rana believes tech stocks could go way up. He expects growth rates to come down over the next 12 months, but if inflation comes down, the following 12 months could see a big rebound.
You can watch a replay of this virtual happy hour on our YouTube channel here. While there, subscribe to our channel to stay up to date on our latest content.
All investments involve risk, including possible loss of principal.
The material provided here is for informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Toroso nor any of its affiliates guarantees any rate of return or the return of capital invested. This commentary material is available for informational purposes only and nothing herein constitutes an offer to sell or a solicitation of an offer to buy any security and nothing herein should be construed as such. All investment strategies and investments involve risk of loss, including the possible loss of all amounts invested, and nothing herein should be construed as a guarantee of any specific outcome or profit. While we have gathered the information presented herein from sources that we believe to be reliable, we cannot guarantee the accuracy or completeness of the information presented and the information presented should not be relied upon as such. Any opinions expressed herein are our opinions and are current only as of the date of distribution, and are subject to change without notice. We disclaim any obligation to provide revised opinions in the event of changed circumstances.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Toroso or its affiliates or any of their officers or employees of Toroso accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Toroso. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of and observe such restrictions (if any).