2022: A Challenging Year for Tech Stocks
Stock markets around the world are feeling the effects of measures to control inflation. Central Banks around the world have been increasing interest rates, including the Federal Reserve (Fed) in the US, which has increased interest rates five times this year already and may increase it again in the near future if Fed Chair Powell’s hawkish stance doesn’t change.
After the most recent Fed price hike, the benchmark S&P 500 and the technology-heavy NASDAQ Composite both declined. Overall, we have seen the NASDAQ lose over 30% of its value YTD and over 6% in the last 3 months. The current market sentiment is fuelled by a fear of global recession, which could make it increasingly harder for tech stocks to bounce back in the near term.
The Performance of Tech Stocks
Many prominent tech companies have struggled to maintain their market position this year, including disruptors such as Tesla (NASDAQ: TSLA), Facebook (NASDAQ: META), and Coinbase (NASDAQ: COIN). To further understand the performance of tech stocks in 2022, let us consider the performance of leading tech ETFs.
ARK Innovation ETF
ARK Investment Management LLC (ARK) is a leading investment advisor led by Chief Investment Officer Catherine D. Wood. The fund has multiple actively managed, thematically structured ETFs, including Innovation (NYSE: ARKK), Fintech Innovation (NYSE: ARKF), and Space Exploration & Innovation (BATS: ARKX), among others.
ARKK invests in disruptive innovation. The ETF has $7.95 billion in net assets and a 0.75% expense ratio. The top holdings of ARKK include Zoom Video Communications (10.2%), Tesla Inc (8.7%), Roku Inc (8.2%), Crisper Therapeutics AG (5.2%), and Uipath Inc (5%).
According to its second quarter 2022 report, ARKK had YTD returns of -57.84%, underperforming the S&P 500 Index (SPX), which had returns of -19.96%, and MSCI World Index (M1WO), with a -20.51% performance. Similarly, ARKK had a Q2 performance of -39.84% compared to -16.10% of the SPX and -16.19% of M1WO. The holdings that had the strongest performance include Crisper, Cerus. and Compugen. Tesla, Unity Software, and Coinbase Global were among the worst performers.
The ARK Fintech Innovation ETF (ARKF) invested in Block Inc (9.8%), Shopify Inc (9.5%), Twilio Inc (7.9%), Coinbase Global (6.3%), and UiPath Inc (7.3%), among others. The ETF had a market price performance of -62.08% (YTD) and -46.68% (3 months).
With a YTD figure of -28.75% and Q2 of -25.10%, the Space Exploration and Innovation ETF (ARKX) performed better than other offerings, but it still underperformed the SPX and M1WO. The top holdings of the ARKX included Trimble Inc (9.5%), Kratos Defense & Security (8%), Iridium Communication Inc (7.1%), Aerovironment Inc (7%), and L3harris Technologies Inc (6.5%).
Large tech companies have also seen a significant drop in value. Among the largest technology companies in the world are the FAANG stocks—Meta (META) (formerly known as Facebook), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Alphabet (GOOG) (formerly known as Google). These five prominent companies had a combined market cap of around $7 trillion as of Q1 2022, and as of August 2021 they made up a staggering nearly 19% of the S&P 500.
However, even the tech giants are not immune to the market downturn. Meta, with a current market cap of $372.52 billion, has suffered a 59.03% decline since the beginning of the year, trading at a low of $134.12 on September 27, 2022.
Apple‘s stock also fell overall during the year. The current price of $145.94, as of October 5, 2022, is a 19.50% YTD drop from $181.26 on January 3, 2022; however, the price dropped to as low as $129.04 during Q2 (June 16, 2022). Similarly, Amazon’s price dropped to $101.26 in Q2 (May 24, 2022) from $170.40 on January 3, 2022. The company is currently trading at $120.41 (October 5, 2022), a 29.34% YTD decrease.
Global streaming giant Netflix, with a market cap of 106.30 billion, reached an all-time high in November 2021 and in May 2022 reported 52-week lows, falling to $162.71 per share. Since then, the company has somewhat recovered and is currently trading at $239.04 (October 4, 2022). Alphabet Inc., formerly known as Google, is currently trading slightly above its YTD low ($96.03 as of September 20, 2022) at $99.30 on October 4, 2022.
Tesla, another major player in the technology sector, reported total revenues of $16.9 billion in Q2 2022, a decrease from $18.8 billion in Q1. Inflation dented the company’s gross margins, reducing them from 32.9% in Q1 to 27.9% in Q2.
Besides inflation, production and supply chain issues were the main challenges faced by Tesla. However, the reopening of the Shanghai factory and new facilities contributed to production in the latter part of the quarter. The company’s stock has fallen 40.18% YTD, from over $399.93 on January 3, 2022, to $239.24 as of October 5, 2022.
Unfortunately, analysts appear to agree that this is not the end for struggling tech stocks. According to data compiled by Bloomberg Intelligence, 2023 could bring even greater declines in profits as Wall Street braces for a potential recession and slower revenue growth.
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