2018 was a great year for tech stocks… until it wasn’t.
The Nasdaq 100 was up nearly 20% for the year. Now it is down 5%.
The big-name stocks all climbed, then spectacularly imploded.
Facebook share prices were dumped overnight in July and shares are down about 25% for the year.
Apple is basically back to where it started the year. Same with Google.
Amazon is still up over 30%, but that’s a far cry from the 70% before the market fell out from under it. Netflix saw a similar drop from a peak of 125% up for the year down to 42% up.
Part of this is to be expected in a drawn out market correction. Tech is right up there at the top of the list of sectors to dump when the market contracts.
But there are some big changes happening under the surface as well, and they’ll keep playing out through 2019.
Plus, there are some new developments and trends to keep an eye out for throughout the year.
We can’t cover everything here, but here is a look at some big trends to watch.
The End of Hero Worship?
In years past, I’ve talked about the seeming infallibility of the mythical founder and CEO.
2018 was the year when we could finally put an end to it. 2019 may very well see it completely reverse.
We’ve seen some bad moves lead to serious questions about the importance and influence of founders in past years. Twitter’s Jack Dorsey stands out here.
Twitter never really reached the inner circle of the Silicon Valley success stories. It never crossed the finish line into profitability, or at least the promise of it. Efforts to step up ad revenue and branch out fizzled and were forgotten.
Now we’re seeing the FAANG stocks leadership under siege.
The bad press keeps piling on Facebook in particular, with very negative press about the company and Chairman and CEO Zuckerberg and COO Sandberg. Rumors abound of stripping Zuckerberg of his position as chairman.
Then there is Tesla, which saw this happen to Elon Musk, who got a pretty light slap on the wrist after publicly imploding while tweeting inaccurate info and running afoul of the SEC.
Jeff Bezos of Amazon is under increasing pressure for being beyond rich while extracting absurd concessions from cities for the now split second headquarters. Plus the grand announcement for an hourly wage increase quickly soured when people realized it reworked the rules to make sure many workers saw no real increase at all.
Google’s business plans are being undermined by its own workers, who seem to protest each and every attempt by the company to expand, all while the EU is demanding billions from it.
Netflix seems to have escaped so far, but it has its own share of controversial content that, in this highly charged political climate, could keep it permanently one step away from organized boycott efforts. Surely its executives are feeling the pressure.
All signs point to this trend continuing at least through next year. Investors were largely able to ignore these issues as long as shares were up, in some cases near or in triple digits for the year.
Following the market’s bearish trend, that protection is gone.
Sharks are circling, ad buyers are wary, and next year may see some dramatic reorganizations from social, political, or shareholder pressure, if not some mix of all three.
The Trade Wars
Talk of the escalating trade war between the U.S. and China tends to focus on things we easily understand, like car makers paying more for steel, or soy bean farmers having to watch their crops rot for a lack of buyers.
The tech sector arguably has it worse. Device and chip manufacturers have built incredibly complex networks of suppliers, both for common and for specialized proprietary components.
This is shaping up to be a logistical nightmare for everyone involved, with no easy answers.
A finished device, like an iPhone or even a fancy Wi-Fi-enabled refrigerator, will have hundreds if not thousands of individual components driving its digital functions.
Most, if not all, will come from another company. Most, if not all, will be partially assembled by another company in another country. A lot of those pass through China.
To make matters worse, the manufacturing facilities for these components are insanely expensive to build, making it absurdly expensive or outright impossible to bring in-house or to find another source.
Chip makers are already getting battered by the uncertainty of future sales coupled with the tariffs being slapped on their products.
We expect this to continue and for hardware component manufacturers to suffer until the trade war issue is resolved. The odds aren’t looking good for this to happen in the foreseeable future.
Also, plummeting cryptocurrency prices have brought an end to heightened demand for high-end components, graphics cards in particular.
On a related note, we see crypto prices treading water through 2019 at best, and continuing to plummet with no obvious level of support to form a floor.
The Real Limits of AI
AI demand is through the roof. AI talent however, is looking increasingly stretched. The mix of the two means that pure-play AI companies will be duds, overall.
As anyone who has followed the tech sector knows, taking something from the R&D lab into the real world is never simple.
The promise of potential applications is quickly whittled down to practical applications that are ready to be used by end users, either in companies or by consumers, who have no idea how anything works.
It is bad enough with PCs and printers. AI takes that to a whole new level.
The problem with AI is there isn’t enough understanding to actually tailor it to real-world applications that aren’t in a centralized back-end system.
In other words, if it can’t be managed by a couple wizards behind the curtain, it will not be rolled out in any realistic timeline.
Companies need more skilled workers and they are incredibly time and capital intensive. Even a whiz kid with an MIT degree will need a lot of time to catch up to proprietary designs.
Expect AI to continue to surge for large applications, but continue to fall short of the pie-in-the-sky “it will be everywhere” predictions.
Also, expect the few small companies with good products to be bought out by the big tech names long before you can get close to owning shares.
For years, tech startups were getting massive paydays from first-round private investors across the board. That isn’t true anymore, but it is true for AI developers now more than ever.
Be very wary of companies that are publicly traded and have small market capitalizations selling AI solutions. Big companies probably passed over them for a reason, and they’re probably either selling shares to cash out as much as possible or will burn through cash and dilute shares for years to come.
What Will Work in 2019
First up, a lightning round of the big stuff…
Of the FAANG stocks, look to Amazon and Netflix to do well. Barring any public relations nightmare, these companies will not be affected by trade wars and have the option to scale back on spending to bolster quarterly earnings.
Amazon in particular can do a lot of balance sheet work to make sure it hits its targets, plus it will continue to make a fortune off of its cloud computing behemoth, AWS.
Netflix is so embedded in entertainment culture it could probably go several quarters with a fraction of its new content budget and keep people binging. Strong international expansion can and will drive share price gains going forward.
Always keep the broader market in mind when looking at share performance and look for good deals for shares of profitable companies. The S&P 500 was up nearly 10% for the year, now it is down 1%. The Nasdaq 100 was up nearly 20% for the year, now it is down 5%.
Smaller tech stocks can and will buck these trends from time to time but a lot of money being pulled out of the market will come out across the board, plus from speculative stocks, and especially going into tax loss season.
Keep relative performance in mind as well as actual performance. The tech sector will re-inflate and sell-offs are great times to get shares on the cheap.
Capitalizing on the lowered prices for profitable companies will pay off in time.
Keep an eye on your inbox for trends we are following now. Our editors are already providing extensive coverage for some major trends. Two major ones are energy metals and autonomous vehicles like drones.
The tech sector is impossibly diverse and I could take up hours and hours covering every aspect. It is better to let our leading editors take over from here on trends we’re already covering.
Vanadium is seeing a massive surge in prices and demand. Prices are up over 350% over the last two years. Nick Hodge has been covering this trend both for the Outsider Club and his Early Advantage readers.
Then there are drones and autonomous vehicles. U.S. Army spending alone is expected to surge from $20 million in 2014 to $327 million in 2019, with the amount doubling from 2018 to 2019 alone.
That is just the start, and just one branch of the military. Across the armed forces, spending is surging.
We’ll continue to cover these trends, along with more to come. Keep an eye on your inbox.
