AI: Potential Top-Position for Google

In the latest quarterly reports, the weak performance of tech giants such as Alphabet (Google) and Apple was pretty much consistent with the expectations of market participants. In the core business, however, they turned out somewhat better, which translated into a few percentage points of positive growth. This development is currently more cyclical than structural in nature. However, it should also be noted that FAANG companies cannot grow by 30-40% on a sustained basis. However, growth at the current level would indicate a good outlook from our point of view.

We expect Google's Q1 results, for example, to be similar to its Q4/22 results. The cost-cutting strategy is likely to take a bit longer to implement than Meta's, so this will not be reflected in its reported financial results until later. As for Apple, the company had production issues in China on Dec. 22 due to Covid-19, which impacted Q4/22, and estimates were lowered accordingly. As a result, iPhone sales, which account for 50% of the business, were down 8% year-over-year in December. The decline in iPhone sales, combined with weaker iPad and Mac sales, led to a 5% cut in estimates for the full year. Apple is the most expensive stock among FAANG companies and has the slowest growth.

Big tech companies such as Google, Meta, Amazon & Co. were among the major winners of the Corona crisis, but lost significant ground in the rotation from growth to value. Now things are returning to normal and some of these stocks are downright dirt cheap. We are in a very interesting situation because these companies are investing massively in the metaverse, but also in artificial intelligence. Meta, for example, the former Facebook, could become a prime stock in this context. Meta has invested $30 billion into this technology.

AI generally adds value to the entire technology and IT industry, as work steps can be performed more efficiently. This type of technological change happens in every generation, which explains why the technology sector is performing best in the long term. This development is especially positive for Microsoft, as it will be able to use open AI or chat GPT in its other products, which will be a turning point in the coding environment for Microsoft Office applications (Word, PowerPoint, Excel, etc.). This could make them more competitive or even push through price increases. Google could take the lead in this market, as the company is way ahead in the field of open AI and has long been under pressure to develop this technology. Recently, their new addition called "BARD" was announced. While Microsoft is expanding its product range with ChatGPT, Google needs to rethink its business strategy as "BARD" could become a threat to Google's own search engine, whose main source of revenue is advertising.

Currently, the fastest growing company is Microsoft. Growth is around 7% and we expect similar levels of growth in the next quarter. The shares are somewhat expensive with a price-earnings ratio of 23, but they have a cyclical component to their business, which is primarily consumer-driven.

Recession and higher interest rates are not likely to have much impact on the technology sector

In general, technology companies are considered relatively resilient in times of economic uncertainty, as technology and innovation are in demand regardless of the general economic situation. In addition, many technology companies have strong balance sheets and solid cash reserves that can help them weather economic challenges. However, some technology companies are more vulnerable to higher interest rates and weaker economic demand, particularly those that have taken on a lot of debt or whose business model is closely tied to consumer spending. It should also be remembered that technology companies operate in a rapidly changing and highly competitive industry, and their success can be affected by factors such as changing consumer preferences, intense competition, and changes in government regulation. However, a recession, which is likely to be painful for the technology giants, is unlikely to change their strong long-term prospects. In fact, they could emerge even stronger thereafter.