US tech stocks: down but not out

The tech valuation reset has hit a lull. A mini-rebound is under way, led by some of the biggest companies, including Apple. If 2021 was a record year for venture capital investment and multitrillion-dollar market caps and 2022 was the worst year for stocks since the financial crisis, will 2023 be the year of recovery or retrenchment?

Initial public offerings are unlikely to start up again soon. By value, US IPO activity hit a two-decade low last year, according to EY data. Social media company Reddit, grocery delivery start-up Instacart and fintech Stripe are all waiting in the wings. But the factors that dried up the IPO market are still mostly intact. Inflation may have peaked but interest rates are expected to keep rising.

Even if predictions for an economic downturn have eased, rising rates weigh on companies that report high growth but no profits. That includes listed stocks. Enterprise software-as-a-service companies lost more than two years of market gains last year. But valuations are still high on some metrics. Take Datadog, which provides tools to monitor performance and trades at 69 times forecast earnings. Or data analytics company Palantir, which trades on 47 times forecast p/e.

The tech-heavy Nasdaq index remains above pre-pandemic levels. To convince investors that prices need not fall further, expect more announcements of job cuts and other cost-saving measures this year. Even after last year’s dismissals, many companies remain far larger than they were pre-pandemic. Meta, for example, announced in November that it would cut 11,000 jobs. Yet after this reduction the headcount is still 50 per cent higher than it was in early 2020.

Instead, 2023 may be a year of stock buybacks. Companies with big cash balances need to flex their powers if they are to differentiate themselves from the rest of the pack. Apple has spent more than $550bn buying back its own stock over the past decade. To keep price recovery momentum going it will need to keep spending.