Stock Breakdown: Technology Overview

Macro Minute:
Folks, we are officially in a recession. Well the “old” definition of a recession now that the definition has changed. Two straight quarters of negative GDP growth with increased unemployment and inflation flying through the roof. The Federal Reserve has just raised interest rates by 75 bps for the past two meetings and there is no sign of slowing down. With the overall recession not only being caused by massive amounts of inflation but supply chain issues that have seemingly never stopped, I keep asking myself the same question: will raising interest rates actually help the economy long term? It seems to be strengthening the dollar in the short term, but businesses need access to capital now more than ever in order to sustain, so how effective will this tactic be?

Sector Description: What is the Technology Industry?
The technology industry is one that is seemingly always at the forefront when it comes to the overall market and discussion. Technology industry is broadly defined as companies that design, manufacture, or distribute electronic devices such as computers, computer-related equipment, computer services and software, scientific instruments, and electronic components and products. With the growing need for tech and the broad range of what is defined as “tech”, it seems like the buzz behind this industry will always continue. Technology companies have been well known for raising massive amounts of capital during the past decade and growing rapidly.

Large Public Companies in the Sector
Apple Inc. (Ticker: $AAPL) - Market Cap: $2.6T
Alphabet Inc. (Ticker: $GOOG) - Market Cap: $1.6T
Samsung Electronics Co (Ticker: $KRW) - Market Cap: $367.3B

Opportunities for Broad Exposure
There are plenty of opportunities to get broad exposure to this industry. One of the highest rated for 2022 is the Technology Select Sector SPDR Fund. You can find out more about this ETF here.

Key Metrics and Considerations
Profit: My biggest fear with many of these companies is that the lack of easy capital will be the demise of many tech companies. As we have seen many tech companies not make any profit for multiple years in a row, I am worried that some of this venture capital money will run out sooner rather than later.
Forward Trend of Tech: Technology is always rapidly moving. For tech companies, it is always about the future. I always look for technology companies that look to get ahead of trends, opposed to being very reactionary. The companies that are ahead of trends and right generally seem to be the winners long term.
Wide Margins: Margins are extremely important when rising interest rates and increased labor costs become an issue. The wider the margin the more flexibility I believe the business has. Flexibility is vital in an unstable market and I believe the technology companies with the best balance sheet will prevail in each area of the technology sector.

Opinion of Sector
I am bullish on the sector long term, but in the short term I am bearish. I believe many in this industry have been extremely overvalued and have not yet been fully corrected. There are many companies deemed as “tech” companies that have also never made a profit and have been deemed growth companies by investors. These growth companies have had the luxury of easy access to capital, but now with the increased interest rates that capital will become more difficult to get. Without this capital, many of these companies will operate at a loss which will not be sustainable.

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