Technology stocks, specifically software names, were punished in 2022, suffering declines of 29.5% according to Fidelity. For most of 2022, tech investors were at the mercy of the Federal Reserve's monetary tightening aimed at battling high inflation, which ended the year at multi-decade highs. Aside from removing liquidity within the market, the Fed raised interest rates seven times, including 75-basis-point hikes on four consecutive occasions.
Fed chairman Jerome Powell in August insisted that the Fed will do whatever it has to do “until the job is done” of getting the cost of living back to its 2% target. Those blunt words didn’t excite investors. And Powell’s words proved true as the Fed went on to raise rates three more times before the year ended. The prolonged tightening pressured the tech-heavy Nasdaq Composite Index which suffered the worst of the three major averages, losing 34% to end the year at 10,466.48.
The Nasdaq features high growth companies sensitive to interest rate hikes since a majority of these businesses must borrow at higher rates to fund their operations. But in 2023 it won’t be hard to find value, given how low valuations have gotten. To be sure, interest rates may continue to rise in the new year given that inflation remains high. Plus, the Fed has shown no signs of pivoting to a dovish stance as it aims to bring inflation back down to their 2% mandate.
However, Wall Street analysts seem pretty confident that things can turn around in the back half of 2023. The average price target for the S&P 500 is 4,031, which is roughly 5% higher from the 2022 close of 3,839.50. It’s not a robust target, but it suggests that a potential contrarian investment strategy would be buying some of 2022’s largest decliners. In that vein, these three Nasdaq 2023 decliners should be stashed in your portfolio for 2023 and beyond.
Apple (AAPL) - Down 28.61% in 2022
With an almost 30% decline in 2022, Apple investors are happy that the brutal year has ended and can finally look towards 2023. Entering 2022, the iPhone maker began the year as the world's most valuable company, reaching a market cap of $3 trillion - the first company in history to reach such a milestone. Its shares last week reached a new 52-week low as analysts continued to lower their production and sales estimates on the company's flagship iPhone 14 line. The company has suffered from prolonged labor shortages at its main production facility in China, and supply chain disruptions and rising inflation have also been among the many events that have pressured the company's revenue and profits in 2022. Although Apple ended the year as the world's most valuable company, it suffered a massive market cap decline of roughly $755 billion, ending the year with a market valuation of $2.07 trillion. However, it’s hard to ignore the attractive valuation in Apple heading into 2023. While iPhone sales generate a sizable portion of revenues, Apple’s collective high-margin Services businesses are also growing. Apple Services segment in 2022 generated a gross margin of 72%, compared to 36% for hardware and devices. In 2023, investors can expect stronger revenue growth and margin expansion, thanks to price increases on Apple Music, TV+ and its One bundle.
Outlook for 2023: With a consensus analyst price target of $176, which suggests a 36% upside from current levels, Apple stock should be on any short list of stocks to buy in 2023.
Microsoft (MSFT)- Down 29.32% in 2022
Although the market continues to remain broadly positive on Microsoft, the company couldn’t escape the market’s overall wrath. With concerns about about inflation, rising interest rates and slower tech spending, the software giant suffered an almost 30% decline in 2022. What’s more, the company spent much of 2022 responding to requests for government regulators who sought to block its $69 billion acquisition of Activision (ATVI), a deal aimed at growing its subscription content and cloud-gaming business. All told, Microsoft ended 2022 with a valuation of $1.79 trillion, which amounts to a decline of $726 billion in market value during the year. However, although Activision will be a key growth asset, the company’s fast-growing Azure cloud platform and the Intelligent Cloud business are cornerstones to the business. Azure and cloud services revenues are growing north of 40% year over year. These growth trends are expected to continue into 2023. Even when factoring tech spending headwinds, Microsoft carries a strong balance sheet with roughly $100 billion in cash reserves and another $75 billion in annual operating cash flow. For some context, Microsoft has enough in its arsenal to acquire Netflix (NFLX), which is currently valued at $131 billion.
Outlook for 2023: With a consensus analyst price target of $296, which suggests a 23% upside from current levels, Microsoft stock should be on any short list of stocks to buy in 2023.
Meta Platforms (META) - Down 64.45% in 2022
Amid the market correction, particularly in tech, Meta Platforms suffered the biggest losses among its FAANG peers in terms of market cap percentage. In losing almost 65% of its value, the Facebook parent saw roughly $450 billion of its market cap disappear, to end 2022 with a market cap value of $320 billion. Aside from slowing user growth and prolonged weakness in digital ad business at its core Facebook and Instagram products, there’s increasing investor concerns whether the company can effectively compete with the likes of TikTok. However, in 2023, even amid inflationary cost pressures and struggles with daily active users, Meta can still beat profit expectations, which are low. Although the company is heavily reliant on digital ad spending growth to fund its various initiatives, and generate free cash flow, the stock nonetheless presents a compelling risk-versus-reward opportunity at current levels. Its shares are priced at just fifteen times forward earnings, while the business still generates strong free cash flow.
Outlook for 2023: With a consensus analyst price target of $152, which suggests a 26% upside from current levels, Meta stock should be on any short list of stocks to buy in 2023.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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