Tech in 2023 – Tale of 3 cities.

Three segments. Three stories.

• Shopify and Cisco reported wildly differing results which combined with economic stimulus sets up 3 divergent themes for the technology sector in 2023.
• Shopify reported Q4 2022 results that beat expectations but then guided that revenue growth would slow more than expected in Q1 2023.
• Expectations were that revenues would grow by 20% YoY in Q1 2023 but this will now come at “high teens” which sent the shares down 11% in after-hours trading.
• This is still reasonable performance but is what happens when one is valued at 8-10x revenues and 50x+ on PER.
• However, it is a further sign that consumer expenditure remains under pressure which is not going to change for as long as inflation remains persistently high.
• This is a scenario that I think will persist until mid-2024, and so the outlook for consumer across the globe is going to be weak everywhere except in China.
• This is story No. 2 where I continue to expect that President Xi will order the stimulation of the economy in an attempt to put the Chinese economy back on a growth trajectory.
• After the mess of Covid Zero and the subsequent public discontent, The CCP badly needs a win on the economy in order to be seen to be delivering on its end of the social contract.
• Hence, I think there will be a bounce in China in H2 2023 which will feed through into the consumer which I see bucking the global trend elsewhere.
• Hence, the Chinese technology sector is likely to do very well in H2 2023 which combined with the fact that it is the cheapest technology sub-segment, means that it could bounce hard and fast as sentiment turns.
• I continue to think Chinese technology will be some of the best-performing tech stocks in 2023 which is reinforced by the fact that hardly anybody agrees.
• The third story is the enterprise which is epitomized by Cisco’s FQ2 FY23 results which were broadly in line with expectations but Cisco was much more optimistic about the next 6 months.
• Q3 FY23 revenues will grow by 11% – 13% YoY compared to forecasts of 6% leading to a better-than-expected profit as well as increases in expectations for the full year.
• This is particularly important because Cisco is a turns-based business meaning that it operates largely off short-term contracts and orders meaning that it is one the best gauges of what is happening in the market right now.
• Despite the general belt-tightening that is going on, spending on IT in the enterprise is continuing to be steady as long as that spending provides productivity benefits.
• Projects that provide greater automation or efficiency and productivity will do particularly well and Cisco is well-placed to benefit from that.
• Hence, I continue to think that enterprise will fare much better than consumer in 2023.
• In order of preference, I like China technology, enterprise and lastly the consumer and I would pick stocks accordingly.
• This is why I hold stocks like Alibaba and Palantir and remain less interested in the likes of Apple or Amazon.