The technology sector is starting to divide into clear winners and losers as AI takes effect.
- The blended earnings growth rate for the Information Technology sector increased to 50.7%
- Nvidia and Micron Technology contributed a significant share of this growth
- The software sector is starting to look like an also-ran, as growth slows
This quarter’s earnings season revealed a growing bifurcation in the technology sector into AI winners and AI losers. The trend has been increasingly apparent since the start of the year, but is now starting to be reflected in the operational fortunes of individual companies.
The sector as a whole saw astonishing earnings growth over the quarter. FactSet data shows the blended earnings growth rate for the Information Technology sector increased to 50.7% from 44.6% from January to March. However, if investors removed just two stocks – Nvidia and Micron Technology – the overall blending earnings rate would have fallen to 28.5%.
The strongest performance has come from the companies benefiting from AI capex spending, rather than those – such as Amazon, Microsoft, Meta or Alphabet - making the investments. The strongest sector by far was the semiconductors & semiconductor equipment sector, where earnings rose by an average of 99%. electronic equipment, instruments, & components, and technology hardware, storage, & peripherals saw growth of 38% and 36% respectively.
At the other end of the scale, software companies saw earnings growth of 23%, in spite of a strong showing from behemoth Microsoft (where earnings per share were ahead of expectations - $4.27 vs. $4.06 forecast.
Markets remain excited by the prospects for AI infrastructure growth. The Philadelphia Semiconductor sector – the main proxy for the sector – is up 68.2% for the year to date. While Nvidia has been solid (up 21.5% year to date), the real share price growth has come in companies that were less high profile. Micron Technology is up 156% for the year to date.
In the meantime, the software sector is friendless. After sliding more than 25% from mid-January to mid-February, it has continued to bounce along the bottom. Some value-orientated managers have dipped a toe back into Microsoft, with the share price down 14.3% for the year to date and a p/e ratio at long-term lows of 24x. However, there remains some high profile sellers. The FT reports that Sir Christopher Hohn’s hedge fund TCI has dumped almost all of its $8bn stake in Microsoft. Blue Whale’s Stephen Yiu sold out last year, while Terry Smith of Fundsmith has also been exiting the shares.
These are strange times. Software stocks are now tempting value managers, while the widget makers are now the glory stocks of the technology sector. The platform companies could lose ground to a new generation of megacaps. The sector always thrives on disruption, but is in a particular state of flux today.
