Q1 earnings season: what to expect from tech companies?

“Investors question whether technology companies have retained adequate pricing power to deal with surging global inflation. Against this backdrop of inflation concerns, good results are receiving a lukewarm market reaction, while poor earnings are being punished. Growth companies in the technology sector have a lot of earnings expectations that are built into their share prices, so even if earnings are positive, the fear is that the market reaction will not be positive if there are signs of slowing growth.”

“However, the issues are not the same for each Tech sub-sector. For consumer Internet companies, the key debate is around the strength of the macroeconomic environment and the sustainability of growth for some Covid beneficiaries. Investors are focusing on the post-Covid consumption trend, as for all companies that have experienced exceptional growth during the pandemic period, investors are trying to determine the appropriate growth profile for the post-Covid period.”

“In the semiconductor sector, the situation is delicate due to (i) ongoing supply constraints and (ii) fears of an upcoming cyclical correction that could hurt demand. This is leading to a situation where the fundamental results of semiconductor companies are being ignored - investors are anticipating an impending correction and looking for clues to try and predict it. Finally, the software industry looks robust in the current challenging environment.”

“Investors have reduced their exposure to growth sectors such as technology as high inflation has led to higher interest rates, which has a negative effect on valuations, while secular growth companies generally trade at a premium. This rate-related multiple compression is largely over. We remain cautious about unprofitable technology companies, as in a higher rate environment, investors are not willing to fund growth at the expense of profitability."

“The industry's move to a cloud-based subscription business model offers resilience and pricing power, ideal attributes in an environment of rising inflation and slowing growth. Software multiples are below the 5-year average (based on P/E and EV/Sales ratios). The trend towards digital transformation is still in its infancy, with only 10% of corporate IT spending having moved to the cloud, a figure that is expected to triple by 2025."

"Companies whose activity was boosted during the Covid crisis may take more than a year to return to normal and pre-coronavirus growth rates. The effects of the reopening may have been delayed because of Omicron and its real impact is expected to appear this year. OTT churn should probably be expected to increase while the macro economy should probably be a headwind.”