It seems as if the stock market is punishing all technology companies regardless of performance. That underlines a set of opportunities for long-term investors.
There were many eyes on this cycle of technology earnings as the markets waited to see if a hawkish Federal Reserve and mixed economic data were pointing to a recession. But earnings season has separated the strong from the weak.
A bifurcation in the technology sector has been evident for some time. While most growth and tech names are lumped together, not all technology companies are created equal, of course. This quarter, a light shined on those companies that are positioned to perform well in this highly uncertain and tepid macroenvironment.
Tech companies that delivered the best results have at least one of these attributes:
- They provide products or services with minimal exposure to consumers.
- They provide ultra-premium products or components serving the most affluent customers.
Enterprise technology is attractive
This quarter’s results were largely better for companies that serve enterprise and business-to-business customers. Cloud revenue at Amazon.com Inc.
AMZN,
Microsoft Corp.
MSFT,
and Alphabet Inc.
GOOGL,
showed slowing rates of growth. A few companies did exceptionally well on this trendline.
Here are four:
IBM: Tech earnings were kicked off by International Business Machines Corp.
IBM,
and the company delivered a stellar quarter showing strength across its portfolio. Under CEO Arvind Krishna, IBM has narrowed its focus to hybrid cloud and AI, and that strategy is working. After spinning off Kyndryl, the narrower focus, execution and growth from its 2019 Red Hat acquisition are turning heads. It also doesn’t hurt that the stock has a dividend yield of close to 5%.
ServiceNow: In a conversation last week, ServiceNow Inc.
NOW,
CEO Bill McDermott said demand for digital transformation is more powerful than macroeconomic headwinds. For ServiceNow, this means workflow, automation, AI and other deflationary technologies are going to be seen as efficiency creators, as companies seek to right-size and refocus. The strong dollar is a challenge for the company, but overall, ServiceNow continues to impress.
Lattice Semiconductor: Right now, semiconductors are a big no-no for many investors, but strength is strength. Lattice Semiconductor Corp.
LSCC,
delivered another “beat and raise” quarter, and with less than 6% of its business coming from consumer-related products, it showed that there is still demand for companies that can provide specialty chips for data-center, internet of things (IoT) and automotive customers. With its new product lines still ramping, the company’s stock is attractive, as it has fallen in line with the rest of the industry, even though its revenue and margins continue to expand.
Honeywell: From clean tech and connected buildings to smart cities and urban air mobility, Honeywell International Inc.
HON,
has been making massive investments in software, security and analytics. Honeywell sees its building technologies unit as its fastest growth engine. The company said that more than 60% of revenue is tied to ESG-related products, so it is using its technology to enable its customers to meet emissions and sustainability goals. (ESG stands for environmental, social and governance, a group of principles.) This quarter the company beat analysts’ earnings estimates and raised the lower end of its guidance while missing revenue by $50 million on $8.95 billion in sales.
Premium for the win, for now
The other trend that could be extrapolated from this quarter’s tech results is the strength of companies that cater to the ultra-premium consumer.
Apple: I expect the consumer-devices business to take it on the chin for at least another quarter or two. That was underlined by disappointing results from Advanced Micro Devices Inc.
AMD,
and Intel Corp.
INTC,
But Apple Inc.
AAPL,
had its iPhone 14 launch, came up a little light on the phones, but made it up with a nice broad performance that was highlighted by the Mac delivering big. CEO Tim Cook’s comments indicate that, with constant currency and headwinds, the holiday quarter may not be great. But the results showed that if any device company can withstand broad economic headwinds, it is Apple.
Read: Tim Cook has been an excellent leader for Apple — these numbers prove it
Qualcomm: Qualcomm Inc.
QCOM,
did everything right this fiscal year. It delivered record earnings per share (EPS) and revenue, and had another strong quarter, but it’s a chip stock, and chip stocks are in purgatory. That doesn’t mean the company isn’t in a good position. Qualcomm delivered a record handset business, where it owns the premium tier and supplies Apple with critical components for iPhones. The company’s IoT business delivered $7 billion, and its automotive business is seeing rapid growth with a design pipeline of $30 billion, including $11 billion added in the past quarter. The now-glut of supply may create a short-term slowdown for Qualcomm — the company said it has up to 10 weeks of inventory in the channel. Still, the company’s products are designed into such a massive portfolio of devices, and diversification into more enterprise and carrier revenue streams makes the market reaction look more like a hawkish Fed selloff than an indictment on Qualcomm and its CEO, Cristiano Amon.
Daniel Newman is the principal analyst at Futurum Research, which provides or has provided research, analysis, advising or consulting to ServiceNow, IBM, Nvidia, Meta Platforms, Oracle, MongoDB, Cisco, Juniper and dozens of other technology companies. Neither he nor his firm holds any equity positions in companies cited. Follow him on Twitter @danielnewmanUV.
