Tech sector Q4 22 – Hatches battened

China may be the dark horse in Q4 2022.

• The technology sector is battening down the hatches for a rough Q4 2022 with the only bright spot potentially being the lifting of Covid Zero in China after the 20^th National Congress of the CCP and a re-rating of the moribund Chinese technology sector.
• Micron reported in-line FQ4 2022 results but forecasted FQ1 2023 revenues $4.0bn – $4.5bn compared to consensus at $6.02bn.
• Furthermore, the company is taking steps to bring down supply by slowing production at existing plants, cutting capex for new ones and keeping a tight lid on OPEX.
• This is in the face of weak demand triggered by both the end of inventory stocking as a result of supply shortages and rampant inflation hitting consumer demand.
• Faced with hard choices, consumers are likely to hold onto their phones, TVs, computers and so on for longer before they replace them.
• This in turn is hitting digital advertising at the worst possible time as Meta is engaged in a multi-year plan to spend a large slice of its profits from digital advertising on reaching for the Metaverse.
• As a result, Meta is pausing the sourcing of new candidates and is not planning on making any new offers until the freeze is lifted.
• This is expected to happen during Q4 2022, but I have a feeling that it is going to last longer than that.
• This is because inflation is going nowhere for a while as the money printing related to the pandemic has not yet been fully paid for through inflation meaning that 2023 is also going to be a tough year.
• Hence, I suspect that when Meta reports Q3 2022 earnings there will be further pressure on revenues and that the expense target will be further reduced from the $85bn – $88bn where it currently stands.
• Furthermore, Sensor Tower is reporting that spending on smartphone digital ecosystems has fallen by 4.8% YoY in Q3 2022 with Apple App Store enduring a 2.3% decline with Google Play at 9.6% YoY.
• This is indicative of the current environment as Apple customers tend to be more affluent and therefore are more able to absorb the impact of inflation without having to find savings elsewhere.
• This will allow Apple to fare better than most of its peers in this environment, but this has already been reflected in the company’s valuation and its share price performance in 2022.
• However, I suspect that the real action in Q4 2022 might be in China where the technology sector remains very depressed with sentiment as bad as I have ever seen it.
• Although the regulator has backed off significantly, there has been no turnaround largely as a result of the Chinese economy remaining in a depressed state.
• China remains mired in Covid restrictions as a result of the state’s Covid zero policy which is preventing it from seeing any of the rebound typically experienced when things open up again.
• This has persisted far longer than I expected but one sharp observer pointed out (and there is growing speculation about this) that the 20^th National Congress of the CCP opens in two weeks where President Xi is almost certain to be given a third term.
• Once this is done, then perhaps the CCP will be in a stable enough position to admit that it got Covid wrong and remove the restrictions to get the economy going again.
• Interest rates in China are already at 4% so there is also some scope for these to be reduced in order to speed the economy back to growth.
• This could be the catalyst to reignite interest in the Chinese technology sector where the big companies are continuing to languish and look very cheap at 12x – 14x 2022 PER.
• Hence, China could be the one place in the technology sector that experiences a good end to what has been a very difficult year.