Advisory Intelligence: Technology Sector Needs to Demonstrate Agility to Navigate Macro Concerns
Jack Menke, senior technology analyst at Nasdaq IR Intelligence, outlines the macroeconomic factors impacting the valuation of TMT stocks
Executives and IR teams in the technology, media and telecoms (TMT) sector should emphasize their companies’ agility in navigating increases in interest rates and bond yields, concerns for tech regulation driven by Democrats and the re-opening of the pre-pandemic economy.
2020 was a banner year for the TMT sector as the pandemic drove the adoption and consumption of more technology-led products and services than ever before. As it stands, just five companies – Amazon, Microsoft, Apple, Facebook and Alphabet – account for more than 20% of the S&P 500.
But since the market downturn in February 2021, some TMT stocks have begun trading sideways or downwards, according to Jack Menke, senior technology analyst at Nasdaq IR Intelligence, who pinpoints several reasons why investors are moving their money from growth to value stocks – and therefore out of the TMT sector.
As vaccination rates continue to rise and consumers are able to return to pre-pandemic activities, Menke says that’s natural that investment dollars will move away from their high concentration in TMT stocks and into other sectors, like travel and entertainment.
"There are companies that are focused on the home category, for instance, that have seen their sales supercharged during Covid-19," Menke says. "But have consumers changed their behavior enough to support current valuations, or will we see capital become a little more distributed as society begins to re-open?"
While investor enthusiasm for re-opening the economy built during the first six months of this year, bonds prices fell and inflation increased. Menke says this could pose challenge for the TMT sector, which has benefited from an innovation-friendly environment since the last recession.
"There are clear tell-tale signs that inflation is here," Menke says, "and investors are teetering on whether it’s transitory or whether it will have longer-lasting effects. Over the last decade, we have been in a low interest environment that has driven a lot of innovation in tech. Smaller companies have been able to borrow money at a lower rate, which has driven innovation. When you see an increase in interest rates, those costs will be passed onto consumers, prices will rise and eventually it will impact stock valuations."
While the Fed is keeping a keen eye on managing inflation rates, Menke says that other arms of the Federal government are also impacting investor sentiment on the TMT sector: namely, the Democratic majority in Congress and the Biden presidency.
"Big Tech regulation has been an issue for the Democrats for several years," Menke says. "Once President Biden gets past Covid-19 issues and employment issues, I wouldn’t be surprised if you see his focus shift towards regulation – maybe even later this year."
Menke adds that a significant regulatory push from the Democrats could lead to more uncertainty for social media companies, advertisers and other Big Tech platforms. For some companies in the TMT sector, however, the downside risk of the new administration could be minimized by President Biden’s Infrastructure Bill, which – in its current form – promises $100 bn-worth of investment in digital infrastructure.
In response to these macro-economic issues that will likely affect the TMT sector during the second half of this year, Menke says that IROs and public company executives need to be able to communicate their "flexibility and ability to adapt."
He continues: "One of the main responsibilities of IROs is to discuss the idea of being able to pivot to the changing marketplace and position themselves as a company that is able to adapt to the new surroundings of re-opening."
Menke adds that companies could consider hosting an investor day in the second half of the year. "We’ve already seen positive reactions to these events in the past few months, with some companies holding their first-ever investor day. It’s a great opportunity for a company to amplify their message with investors."