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Technology stocks: outlook for the remainder of 2024

Hyun Ho Sohn

Hyun Ho Sohn - Portfolio Manager

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To buy in or sell out? After the stellar returns delivered by the Magnificent 7, the outlook for the technology stocks remains a key question for investors. Overall, technology stocks have done well in 2024, both on an absolute basis and relative to the broader market. However, within the sector, there has been a wide divergence in performance. Large caps significantly outperformed small caps, and semiconductor stocks have delivered excellent returns. Software and internet stocks have also done well, while sub-sectors such as hardware, communications equipment, and IT services performed poorly. We saw divergence even within the “Magnificent 7” mega caps, with Nvidia and Meta leading the rallies while Apple and Tesla lagged.

Key points:

  • Technology stocks have performed well in 2024 relative to the broader market, but there has been a wide divergence in performance, even among the ‘Magnificent 7’ mega caps.
  • The market appears to be underestimating the scale and pace of adoption of generative AI.
  • The high valuations of the Magnificent 7 and AI should not overshadow the pool of companies offering promising growth prospects and opportunities for investors to diversify their portfolios.
  • We keep a close look at payment services and networks, on-demand media and gaming sectors. From a geographical standpoint, there are a number of high-quality Chinese companies available at attractive prices.

 Technology stocks continue to outperform

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Source: Refinitiv, June 2024. Past performance is not a reliable indicator of future returns.

Nvidia: “go or no go”?

The Californian chip-maker controls more than 80 % of the market for chips used in artificial intelligence (AI) systems. With a market capitalisation that has increased by more than 40% since the start of the year, reaching over $3,352 billion, Nvidia has recently surpassed Microsoft and Apple to become the largest public company in the world.

While the company’s recent results delivered the expected beat and raise, and management continued with their bullish tone, they did not represent as much of a positive surprise as previous quarters. Looking back to last year, at one point, Nvidia’s quarterly results beat consensus expectations on revenue by c.20%. The beat subsequently narrowed to c.10% in the January quarter and has further narrowed to c.5 - 6% in the last results. The company has been increasing revenues sequentially by c. $4bn a quarter consistently, which, of course, represents strong momentum but is not staggering, particularly given that capacity constraints (around advanced packaging) have substantially eased so that Nvidia is able to produce more Graphics Processing Units (GPUs). Fundamental momentum seems to be slowing, and the risk/reward for the stock is skewed to the downside - beating expectations is becoming more difficult, and any hiccup in results is unlikely to be tolerated by the market.

The road ahead for AI

The potential of generative AI remains an attractive proposition. However, there are plenty of under-appreciated beneficiaries along the AI value chain - segments such as IT consulting, data infrastructure and the cloud, which will play a pivotal role in the large-scale deployment of AI, but are not yet receiving the attention they deserve.

The gaming industry is entering a new period of innovation, where user engagement is likely to rise. AI can help the industry develop more engaging offerings with more dynamic interaction. Gaming companies are also evolving their models to monetise effectively across various touchpoints, which could help the industry double in market value over the next 5-6 years.

The market expects a massive AI infrastructure buildout without any speed bumps, but despite generative AI’s long-term potential, there are also under-appreciated risks.

There are positive signs of generative AI adoption in digital media, creative industries, and consumer internet – where the uptake of new technology tends to be quick. For many large enterprises, however, particularly in regulated industries such as financial services, many generative-AI projects remain at the proof-of-concept stage. Despite rapidly falling AI computing costs, there are many areas where those costs remain too high for mass adoption. Training large language models requires cutting-edge data centre infrastructure and consumes massive amounts of electricity, which could become a bottleneck. Given the cyclical nature of capital spending, if generative-AI adoption hits a speed bump, AI infrastructure demand will be hit even harder.

Beyond AI, other opportunities lie within the technology sector

We anticipate continued growth across numerous technology sectors throughout the remainder of 2024. In addition to the continued advancement of AI, we see positive prospects for many technology segments in the coming months. Payment services and networks are essential technologies for e-commerce and multi-channel distribution. Companies with the right scale and technological advantages will be well-positioned to capitalise on long-term growth opportunities.

It appears that on-demand media and music streaming are under-reviewed by the market, despite the promising growth prospects for the sector's leaders. These companies are well positioned to benefit from the consolidation currently taking place. Furthermore, it would be prudent to monitor the performance of smaller and mid-sized software publishing companies, given the renewed appetite for mergers and acquisitions in this area. On-demand media and music streaming are still under-monetised, but industry leaders are well-positioned for further consolidation.

Despite regulatory and geopolitical risks, there are also some quality Chinese companies available at attractive prices including some tech majors. These companies remain strong, are selling on low multiples and pursuing more shareholder friendly policies.

In summary, technology stocks will continue to represent a strategic allocation in equity portfolios for the remainder of 2024, but with a selective and cautious approach. The semiconductor and software segments, still offer attractive investment opportunities despite the increased risks associated with high expectations and fierce competition. Other technology sectors, such as payment services and on-demand media, also offer promising growth prospects. The fast-paced changes in the technology market underlines the significance for investors to diversify their portfolios when investing in technology.

 Technology sector valuations by region

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Source: Refinitiv, June 2024.

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