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The Big Tech story
Before discussing the reasons why the Big Tech could be fundamentally vulnerable, it’s important to understand the Big Tech story. First of all, the Big Tech companies are the tech giants on forefront of innovation: Microsoft (MSFT), Apple (AAPL), Nvidia (NVDA), Amazon (AMZN), Meta (META) and Alphabet (GOOG) (GOOGL).
Collectively, these 6 companies account for almost 45% of the Nasdaq 100 index, which is tracked by Invesco QQQ Trust ETF (NASDAQ:QQQ).
Here is the long-term chart of Nasdaq 100 QQQ ETF. After the dot.com bubble in 2000, the Nasdaq 100 was underperforming until about 2016, when the uptrend accelerated towards the 2000 bubble-highs by 2020. But it was really after the pandemic that the tech stocks started to rise, led by the mega caps.
So, let’s focus on the tech performance after the pandemics, or from the year 2020.
Yes, the big tech companies’ earnings have exploded over the last 3-4 years, but the price increased even more, giving QQQ currently a bubble-like PE ratio of 35.66 according to Yahoo Finance.
The PE ratio at 35 suggests that investors expect that the earnings growth over the last 3-4 years is likely to continue, or possibly even accelerate. However, the earnings growth is unlikely to continue at the same pace, in fact, it’s likely that the big tech earnings growth will slow down considerably.
Specifically, the pandemic caused a huge demand for tech products to enable remote work and distance education, from companies and individuals. In addition, the combination of extraordinary fiscal and monetary stimulus injected funds into the consumer hands, which they spend heavily on 1) tech products, 2) shopping online, and 3) social media for leisure and entertainment. Thus, the big tech was a clear beneficiary of the pandemics.
Yet, the big tech firms started to miss the earnings estimates in 2022, which forced some of them to cut workforce and become more cost efficient. And then, the GenAI investment cycle in 2023 added a new dimension to the big tech performance and earnings, which brings us to the current situation.
Unless there is another pandemic related lockdown, and extraordinary pro-cyclical stimulus, the big tech earnings growth is likely to decelerate, despite the GenAI hype.
The analysis
The full analysis involves three parts: 1) the macro story, 2) the firm-specific story and 3) the momentum.
The macro story
The macro story is very simple:
- The yield curve is inverted, which will produce a recession after the long and variable lags of the prior monetary policy tightening eventually hit the economy.
- The Fed is unable to preventively cut interest rates to avoid the recession due to the “sticky” and elevated inflation, well above the Fed’s target.
- Thus, QQQ is facing a recessionary bear market.
- But, over the near term, the repricing of the Fed’s policy and higher interest rates are likely to cause a correction due to PE multiple contraction.
The firm specific story
The firm-specific factor analysis reveals that the big tech companies are becoming vulnerable.
- Microsoft is the biggest company in the index, accounting for 9% of QQQ. Microsoft is also the strongest company fundamentally – but possibly too strong. Specifically, Microsoft is taking the leadership in the GenAI race, and starting to incorporate Copilot into the productivity tools, with the backing of Azure. But Microsoft also tried to incorporate Netscape browser with the productivity tools in the 1990s – and that was stopped by the antitrust lawsuit. Microsoft is playing the exact same playbook now with Copilot, and it will likely end the same way – with the antitrust lawsuit.
- Apple is basically still all about the iPhone and the iPhone related services, with significant exposure to China. Apple has been looking for the next big thing (it’s not going to be an iCar), and it looks like they really have nothing, possibly an AI iPhone, which is still an iPhone. In addition, Apple is facing the antitrust lawsuit for blocking the iPhone ecosystem from competitors – and this is an existential threat.
- Nivida basically benefited from the panic-buying of GenAI-capable chips in 2023, but now it looks like many of the big-tech firms are producing these chips internally, while other chipmakers are also catching up with their production.
- Amazon gets 85% of its revenue from online shopping and 15% of revenue from the cloud service AWS, but 80% of the profit comes from AWS. Thus, Amazon is all about AWS. In fact, all big tech firms are now all about the cloud and the data centers – that’s the main growth driver for Microsoft too. Thus, the competition will be fierce.
- Meta gets 98% of the revenue from the ads, from Facebook and Instagram, and it’s heavily investing in the AI for “better engagement”, but this is likely ad targeting, possibly based on AI “social scoring” and “predicative policing”. The problem is these practices are illegal now in Europe, based on the EU AI Act. Meta’s AI operations will be under heavy threat from the AI regulation globally, and this could be an existential threat.
- Google gets 88% of its revenue from ads and subscription, out of which 56% come from Search. ChatGPT is possibly a new way of information gathering, and it’s ad free. Google’s model of ad-based search is under threat, and Google is trying to reposition, possibly competing in (guess where) the cloud.
The momentum
The strong uptrend in QQQ since October 2023 is weakening. In fact, QQQ has been flat since March 1st, and down over the last month. The important uptrend support level at 20dma has been broken, and QQQ is currently “sitting” on the key 50dma support. Once this support is broken, QQQ is facing a 10% correction to 200dma at 394.
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Implications
All big tech firms are facing serious threats, either due to regulations, antitrust issues, or AI-related disruptions. It is very likely that the unfolding GenAI revolution will result in one of these giants becoming obsolete (possibly Google).
In support, consider that many tech firms from the 1990s did not survive. Cisco (CSCO) is still below the 2000 highs; and it took Microsoft 15 years to reclaim the 1999 high.
Over the near term, the macro situation is deteriorating, which suggests that the overpriced QQQ is possibly facing a deep correction. The weakening momentum is increasing the probability of a 10% correction. More importantly, this could be the beginning of a longer-term recessionary bear market.
Thus, I am downgrading QQQ from Hold to a Sell.
