Buffett has a famous saying: 'Only when the tide recedes do we know who is swimming naked.'. Nowadays, as the peak of the AI wave gradually passes, people cannot help but find that there seem to be many "naked swimmers" in the technology industry.
Industry insiders' recent analysis of Q2 financial reports shows that the enthusiasm for artificial intelligence actually masks the weak performance of most technology companies in the industry. After the slowdown in performance since 2022, many companies are still in recession.
In the past year and a half. The stock prices of large companies such as NVIDIA and Microsoft, which are expected to be early beneficiaries of artificial intelligence, have risen sharply, helping people erase the terrible memories of 2022, when the tech dominated Nasdaq Composite Index fell by nearly one-third. However, beneath the surface, many technology companies that have not focused on artificial intelligence have been struggling to regain momentum for development.
Tony Kim, head of fundamental equity investment at BlackRock, said that when you look at technology fields outside of artificial intelligence, you will find that they have not made much progress. Many (sub) industries are still in decline. The only sector that is truly growing is the artificial intelligence sector.
Under the surface of the AI wave
For example, software, IT consulting, and the production of electronic equipment for other industries, such as manufacturing and the automobile industry, and other traditional scientific and technological fields, are still facing difficulties. The challenges they face include weak demand, as well as the sequelae caused by excessive expansion and inventory backlog during the COVID-19 epidemic.
Some companies are even suffering from the negative impact of the wave of artificial intelligence, as budget limited clients have readjusted their investment direction.
Dustin Moskovitz, co-founder of Facebook and current CEO of Asana, summarized the situation of many companies last week. This business software group has reduced its performance forecast for the second half of this year. Moskovitz said, "What we are still seeing in the technology field is the legacy of excessive recruitment and spending in the early stages of the pandemic. I believe that all of this is related to the huge uncertainty of the economic environment. Also, it is about how artificial intelligence will develop
Recent financial reports indicate that the growth rate of most large tech companies is slower than in the past, while many smaller tech companies are actively downsizing.
Industry data shows that companies in the S&P 500 Information Technology Index have seen an average revenue growth of only 6.9% over the past 12 months, compared to an average growth rate of 10% over the past five years. About three-quarters of companies are growing at a rate lower than the recent average. Over the past 12 months, the average earnings per share of the constituent companies of the index have increased by 16%, lower than the 21% in the past five years.
(S&P 500 Information Technology Index)
In fact, the signs of weakness in technology companies are even more evident in small cap stock indices, as the rise of large tech stocks has provided little boost to small tech stocks. According to LSEG data, technology stocks were the second worst performing sector in terms of revenue growth in the second quarter of the Russell 2000 Index: revenue decreased by 6.1% year-on-year and profits decreased by 2.8% year-on-year.
Ted Mortonson, a technology industry strategist at RW Baird, stated that generative artificial intelligence (AIGC) masks cyclical declines in many other core industries.
Even in sub industries such as chips that are attracted by the passion for artificial intelligence, some business lines are struggling. For example, Brice Hill, Chief Financial Officer of Applied Materials, a traditional chip equipment supplier, stated last month that "we see particularly strong pull related to artificial intelligence and data center computing, but the automotive and industrial end markets are facing weakness.
John Barr, portfolio manager at Needham Funds, also pointed out that in the industrial sector, the situation is similar everywhere. He has invested in several semiconductor companies, including Applied Materials. The current growth momentum is not very good, so we are looking for companies with stable businesses that are laying out new things
Can 'small wheel movement' appear?
It is worth mentioning that since early summer, some investors' enthusiasm for investing in AI focused companies has faded, leading many commentators to predict that investors' attention will gradually shift from large tech stocks to areas such as financial services and industry, which may bring some comfort to some struggling companies in the tech industry in the past few years.
Some experts in the technology industry hope to see a "small movement" within the industry, similar to the market rotation this summer - shifting from the largest artificial intelligence stocks to previously relatively unpopular corners of the industry.
Although few companies have achieved triple digit growth like Nvidia in recent quarters, there are signs that some of the worst performing areas in the technology industry are indeed turning around.
Regarding this, Tony Wang, portfolio manager of T Rowe Price Technology Fund, said, "I think we see a stable trend: in areas that are more sensitive to macroeconomics, the situation is no longer deteriorating, and if interest rates fall, it will be helpful
I think in the past two years, people have always believed that artificial intelligence is the only technology worth investing in. But I'm not sure if this will continue to be the case in the next two years
