Growth stocks endured a tepid year in 2022 as surging interest rates and the easing of the pandemic resulted in a reduced appetite for technology stocks.
The pandemic resulted in a surge in demand for digitalisation and e-commerce as a wide swath of the world’s population went online on their electronic devices.
As 2023 rolled by, investor sentiment towards technology stocks remained lukewarm as high inflation also led to reduced consumer demand.
The good news is that things could be looking up for the sector.
Technology giants Alphabet (NASDAQ: GOOGL) and Meta Platforms (NASDAQ: META) have seen their share prices jump as both announced healthy earnings.
Alphabet’s share price has risen by 18.2% year to date while the owner of Facebook and Instagram has seen its share price nearly double to US$239.24 over the same period.
Could the worst be over for the technology space?
Sturdy financial results
Granted, both Alphabet and Meta Platforms announced encouraging sets of financials for their fiscal 2023’s first quarter (1Q 2023).
Alphabet saw its revenue inch up 3% year on year to US$69.8 billion but operating profit shrank by 13.3% year on year to US$17.4 billion.
Net profit eased by 8.4% year on year to US$15.1 billion.
Still, these numbers came in at the top of analysts’ expectations while Alphabet also authorised a US$70 billion stock buyback.
Crucially, Alphabet also saw its Google Cloud revenue jump 28.1% year on year to US$7.5 billion and this division turned in a small operating profit of US$191 million for 1Q 2023.
Over at Meta Platforms, sales grew at 3% year on year to US$28.6 billion in the quarter but represented the first year on year increase in four quarters, buoyed by demand from Chinese advertisers as the country reopened its borders.
Net profit fell by 24% year on year to US$5.7 billion but both sales and net profit still beat expectations, causing the stock to surge 14% after the 1Q 2023 earnings were released.
Consumer demand is holding up
These results may be an early indicator that consumer demand continues to hold up despite warnings of high inflation and interest rates.
One reason for this is China.
The Middle Kingdom has opened up its economy and its citizens are eager to spend and travel after being cooped up by lockdowns for nearly three years.
Meta Platforms has also demonstrated that it can continue growing its user base, showcasing persistent demand for social media.
Daily active users rose 3.9% year on year to two billion while monthly active users edged up 1.8% year on year to nearly three billion.
Alphabet’s cloud computing division has continued to report double-digit year on year growth despite the macroeconomic headwinds.
E-commerce behemoth Amazon (NASDAQ: AMZN) also reported a 9% year on year rise in revenue to US$127.4 billion for 1Q 2023, another indication that demand is holding up for electronic transactions.
Strong companies can continue to innovate
Technology is a field where innovation and constant evolution bring about exciting developments and growth opportunities.
Hence, it is natural that the best and biggest companies within this sphere are in a good position to innovate and become better.
Meta Platforms, Alphabet and technology giant Microsoft (NASDAQ: MSFT) continue to devote large sums to artificial intelligence (AI).
The advent of generative AI in software such as ChatGPT has prompted these companies to invest money to develop this groundbreaking segment.
Meta Platforms is tapping on generative AI to create advertisements for different companies by the end of this year.
Google, Alphabet’s search engine business, plans to introduce generative AI into its advertising business to create “novel” advertisements.
Get Smart: More evidence needed
It is important to remember that these results are from a small and select group of multi-billion-dollar businesses.
As such, it is useful to track the financial and operating metrics of a larger group of companies to determine if overall consumer demand is healthy.
iPhone giant Apple (NASDAQ: AAPL) is slated to report its earnings this evening and will constitute another important data.
The software-as-a-service (SaaS) sector is another area to monitor.
Continued top-line growth for this select group of businesses will imply that technology stocks are still relevant and that the recovery in valuations may not be far off.
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Disclosure: Royston Yang owns shares of Alphabet, Apple and Meta Platforms.
