Rising interest rates and inflation haven't dampened prospects for many well-run companies
After technology stocks hit a wall in the first half of 2022, some investors may question whether the digital revolution has peaked. But at least one investment leader believes that’s unlikely.
“Rising interest rates and inflation have certainly clouded the longer-term earnings picture for many of these companies. For those with limited earnings today relative to their market values, the pullback was warranted,” said Chris Buchbinder, a principal investment officer for the Capital Group U.S. Equity Fund (Canada). “But I believe there are also well-run software companies in fast-growing segments with favorable prospects.”
Buchbinder shared this view in Capital Group’s recently published Midyear Outlook for 2022.
According to the report, the cloud services industry has significantly increased as companies moved their typical enterprise IT operations to the cloud.
When Amazon Web Services first became available a few years ago, it truly represented a new market, according to Buchbinder. We are still in the early stages of this transformation, even though it is no longer new.
Although it did not enter this industry first, Microsoft is outpacing AWS and Google Cloud in terms of growth because of its solid existing business partnerships.
Data on the cloud revenue across three major cloud computing service providers shows Microsoft with a four-year annualized growth of 23%, generating US$53.2bn in 2020 and US$67.8bn in 2021.
Microsoft's cloud services unit had a quarterly growth of 32% over a year earlier as of April 2022, putting it on track to generate close to $100 billion in sales annually.
Amazon fared almost as well, with US$45.4 billion in cloud revenue in 2020 and US$62.2 billion in 2021, showing a four-year growth of 37%. Meanwhile, Google Cloud took in a comparatively tame US$13.1 billion and US$19.2 billion in 2020 and 2021, respectively, with a four-year growth of 48%.
“It is not a certainty that all cloud businesses will realize the profit growth to justify high valuations,” Buchbinder said. “That is why selective investing through fundamental research is essential.”