Tech stock earnings preview: Inflation's impact on FAAMG

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Matt Weller
By :  ,  Head of Market Research

Tech earnings in focus after a mixed start to the year

The gargantuan technology stocks that account for an outsized proportion of the major US indices have had a mixed start to the year. Between the lingering COVID pandemic, military conflict in Ukraine, an ongoing shortage of semiconductors, and surging inflation, the broader macroeconomic backdrop has turned more difficult for risk assets, including equities of all types.

Inflation’s impact on Big Tech

Of the aforementioned headwinds, surging inflation (and accompanying interest rate hikes from the Federal Reserve and other central banks) may be the most significant one for the fast-growing technology sector. Historically, traders have rotated out of so-called “growth” stocks and into “value” companies when inflation is elevated, and we’re certainly seeing that same rotation taking place to an extent so far this year.

The tech-heavy Nasdaq 100 index is trading down by about -10% year-to-date, weighed down by beleaguered Microsoft (-15% year-to-date) and Meta/Facebook (-36%) so far in 2022. On the other hand, Apple (-8%) and (-8%) are holding up relatively well, perhaps on the back of their massive free cash flows and the insensitivity of their profits to the broader macroeconomic environment. In other words, most consumers would cut back on many of their other expenses before considering cancelling their subscription to Microsoft Word or not buying an essential app for their iPhone.

Guidance in focus

Investors will be leaning on management guidance to determine whether the outlook for tech stocks will get worse before it gets better. As we’ve recently seen with Netflix (NFLX), signs of stalling growth and soft guidance for the rest of the year can crush even popular large-cap stocks. Of particular interest for the FAAMG names will be any updates about how they’re handling the global semiconductor shortage, which some analysts suggest could stretch will into 2023 and continue to impact essential supply chains.

Was the pandemic a blessing or a curse for Big Tech?

Ironically, the rapid, unexpected growth in work-from-home stocks like Zoom Video (ZM), Docusign (DOCU), and Netflix (NFLX) over the last couple of years may have ultimately been a curse; investors bid up many such tech stocks on hopes that the rapid growth would be maintained but instead the firms have struggled to scale and in many cases are trading lower than they were pre-pandemic.

While it’s doubtful that dynamic will play out to the same extent for the omnipresent FAAMG stocks, there may still be some negative impacts from management prioritizing short-term remote-enabled projects at the expense of longer-term initiatives. Regardless, it’s likely that as society continues to grow more and more digitally-focused, most of the FAAMG names will become ever more entrenched into our day-to-day lives.

Stay tuned to our site for previews of these individual names in the coming week for more detailed analysis!

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