[TOP STORY] Don’t assume Big Tech’s downward cycle has ended

SIMON BROWN: I’m chatting now with Schalk Louw. PSG [Wealth] Old Oak is where you’ll find him. Schalk, I appreciate the early morning. I’m looking at a chart right now. I’m sure that you have looked at it as well recently – [about] Big Tech in the US over the last 12 months. You’ve got Meta down two-thirds, Netflix off a half, Amazon [has taken] a 45% hit, even Microsoft’s down a quarter. The only one that is kind of flat is Apple, and it’s down 0.16%. I suppose you’d give it to them and say they’re flat. Are you looking at this and thinking ‘juicy opportunities here’, perhaps in some of these once high-flying large tech stocks?

SCHALK LOUW: [Chuckling] Good morning, Simon. Well, I think the short answer is ‘no’. I see all your graphs and, and I’ll raise you the PE graph, which I’ve actually drawn up over the past 25 years. Let’s not look at the 2000s, because we know what the scenario was for tech stocks back then. It was a totally different scenario. But I look at the recent PE ratios on the Nasdaq and I say ‘recent’ [is] over the past three years. I think a lot of investors out there, people in the media, are saying, well, you need to start buying the dips. We’re not trading at the 42 times PE ratios we traded at in December 2020. I mean, 25, if I can paraphrase it, is juicy.

There are two things in a PE. There’s the price and the earnings. You just mentioned the likes of the Metas; you mentioned Apple. A few things stood out for me. I went through all their recent reportings and, besides the fact that people are getting laid off, this is the start … and I think this is my message this morning, literally starting off with a message: be very careful thinking that this is the end of a cycle, end of the downward cycle.

… because this can effectively be the beginning of a cycle. When we look at the beginning of [the 2000s], it took these tech companies quite a few years to rectify let’s call them ‘the sins of the past’.

Amazon – we saw them come out recently with the results. They mentioned they’re going to lay off 10 000 people. It might sound like a lot. Just remember, they employ about 1.5 million people, so this is not even 1% of their total workforce.

But what stood out for me was when you look at their income – and more specifically their Ebit or operating income – that’s a serious decrease, a decrease of $2.5 billion down to $2.5 billion from $4.9 billion. That’s close to a $2.5 billion decrease.

That tells me we need to look at the ‘E’ in this PE. The current P of 25 might therefore not be that juicy, as you said.

Meta – the same story. They are actually planning to retrench or fire 11 000 people. That’s slightly bigger, and that’s 13% of their workforce. Again, a very similar story. Their net income was down nearly 52%, and they actually state that they don’t see this as the end. They actually feel that there’s definitely more to come.

A very similar trend came through [with] Microsoft and Apple. You mentioned Apple. Apple – yes, they still managed to increase their revenue, but they did state that iPhone 14 sales are not going as planned. Tim Cook specifically said it: “We would’ve grown double-digits if it wasn’t for the strong dollar.” Very similar to what Microsoft is saying, strong dollar, higher interest rates.

And yes, this to me is worrying and I think that the golden thread between these companies [is] they all mention that they feel there is more pain to come.

To end off, I think you need to remember what these companies are selling. They’re selling to the consumer specifically. Their biggest market is the US consumer. And the most interesting thing that came out for me this week was the release of the US consumer debt data. This is the first time in let’s call it 14 years since 2008 – when we know what the US consumer did – where we see this type of jump.

[US] household debt added $351 billion. This increase is the largest one we’ve seen since 2008. Credit card debt rose 15%. This is the highest in 20 years. You can see that US consumers are struggling with this inflation.

And what are they doing? They’re actually increasing their debt.

Be very careful, all the listeners out there, thinking that these are juicy buying opportunities. I think this should seriously be monitored.

SIMON BROWN: I take the point. It is about those Es. Price is one thing, but it’s the Es and those Es potentially coming down. I’m looking at the Nasdaq back at that 2000. Yes, from top to bottom it was close on two years. We could be only halfway through this. Certainly the risk of recession in the US is real. Things could get tougher and, frankly, we can spend less at Amazon and we can buy [fewer] fancy phones, etc.

Always a pleasure. Schalk Louw of PSG [Wealth] Old Oak, I appreciate the early morning.

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