It seems as if the stock market is punishing all technology companies, regardless of their performance. That underlines a set of opportunities for long-term investors.
There were plenty of eyes on this tech earnings cycle as markets waited to see if a hawkish Federal Reserve and mixed economic data pointed to a recession. But earnings season has separated the strong from the weak.
A bifurcation in the technology sector has been apparent for some time. While most growth and tech names are lumped together, not all tech companies are the same, of course. This quarter, a light shone on those companies that are positioned to perform well in this highly uncertain and tepid macro environment.
The top performing tech companies have at least one of these attributes:
They provide products or services with minimal exposure to consumers.
They provide ultra-premium products or components that cater to the wealthiest customers.
Enterprise technology is attractive
This quarter’s results were largely better for companies serving enterprise and business-to-business customers. Cloud Revenue at Amazon.com Inc. AMZN,
Microsoft Corp. MSFT,
and Alphabet Inc. GOOGL,
showed slower growth rates. Some companies did exceptionally well on this trend line.
Here are four:
IBM: The technology gains were pioneered 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 more limited focus, execution and growth of its 2019 acquisition of Red Hat is drawing attention. It also does not hurt that the stock has a dividend yield of close to 5%.
service now: In a conversation last week, ServiceNow Inc. NOW,
CEO Bill McDermott said that the demand for digital transformation is more powerful than macroeconomic headwinds. For ServiceNow, this means that workflow, automation, AI and other deflationary technologies will be seen as efficiency creators as companies look to downsize and refocus. The strong dollar is a challenge for the company, but overall ServiceNow continues to impress.
Lattice Semiconductor: Semiconductors are a big no-no for many investors right now, but strength is strength. Lattice Semiconductor Corp. LSCC,
delivered another quarter of “outperforming” 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 centers, Internet of Things (IoT ) and automotive customers. With its new product lines still on the rise, the company’s stock is attractive as it has fallen in line with the rest of the industry, even as its revenue and margins continue to expand.
Honeywell: From clean technology 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 more than 60% of revenue is tied to ESG-related products, so it is using its technology to enable its clients to meet emissions and sustainability targets. (ESG stands for Environmental, Social and Governance, a set of principles.) This quarter, the company beat analysts’ earnings estimates and raised the lower end of its guidance, while losing $50 million in revenue on $8.95 billion in sales.
Premium for the victory, for now
The other trend that could be extrapolated from this quarter’s tech results is the strength of companies serving the ultra-premium consumer.
Apple: I expect the consumer device business to take 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, it came out a little light on phones, but made up for it with good broad performance that was highlighted by the great delivery of the Mac. Comments from CEO Tim Cook indicate that, with a steady currency and winds in against, the holiday quarter may not be great. But the results showed that if any device company can withstand economic headwinds, it’s Apple.
Qualcomm: Qualcomm Inc. QCOM,
did everything right this fiscal year. It posted 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 does not mean that the company is not in a good position. Qualcomm delivered a record in the mobile phone 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 $30 billion design pipeline, including $11 billion added in the last quarter. Oversupply now may create short-term slowdown for Qualcomm: company He said he 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 carrier and enterprise revenue streams makes the market reaction more like a Fed sell-off than to an indictment against Qualcomm and its CEO, Cristiano Amon.
Daniel Newman is the principal analyst atFuture Research, which provides or has provided research, analysis, advice or consulting to ServiceNow, IBM, Nvidia, Meta Platforms, Oracle, MongoDB, Cisco, Juniper and dozens of other technology companies. Neither he nor his company hold capital positions in the aforementioned companies. Follow him on Twitter@danielnewmanUV.