What happened
Shares of large-cap tech platforms Amazon (AMZN 1.87%), Microsoft (MSFT 2.62%), and Alphabet (GOOG 2.47%) (GOOGL 2.42%) were up strongly on Tuesday, with each rising over 3% to start the day, before Amazon and Alphabet fell to more modest gains of 0.5% and 0.6%, respectively, and Microsoft actually ventured into negative territory, down 0.7% as of 11:57 a.m. ET. Still, all three outperformed the broader tech-heavy Nasdaq Composite, which was down more than 1% by that time.
There wasn't much in the way of new news to start the year for either of these three tech giants; however, these seemingly invincible market leaders shockingly fell between 28% and 50% in 2022. So, it's no wonder they are catching a bid as investors perhaps look to cautiously bargain-hunt to begin 2023.
So what
2022 was an historically bad year for these three names, with Amazon down 49.6%, Microsoft down 28.7%, and Alphabet down 38.7% on the year, respectively.
Data by YCharts.
Since these tech giants, unlike a lot of other newer growth names, actually generate healthy profits, they are likely attractive targets to begin 2023, offering a way to play a bounce-back in growth tech stocks without as much risk as some of the less-profitable or unprofitable sector challengers. Investors may also be flocking to these three especially since their 2022 issues appear to be either temporary or purely related to the macroeconomic downturn, whereas other former tech darlings such as Tesla appear to be having more severe problems and investor doubts about their future.
For instance, Amazon massively overspent building out infrastructure during the pandemic, and was also hit by rising fuel prices throughout 2022; however, CEO Andy Jassy is now rationalizing Amazon's logistics footprint, cutting non-core projects, and laying off some of the hires made over the past two years. Moreover, gas prices have plummeted over the past few months, which should begin to help Amazon's e-commerce margins. This past weekend, Amazon was actually named one of Barron's top 10 picks for 2023.
Alphabet has been hammered over concerns about the digital advertising market in case the economy heads into a recession. However, Alphabet also has a lot of net cash -- over $100 billion worth -- and after its 2022 downdraft, it trades at the cheapest valuation of these three stocks, at just 17.7 times earnings.
Meanwhile, Microsoft is seen as perhaps the most defensive of these three, which is why it was down the least in 2022. While its growth slowed last year and the strong dollar hit Microsoft's international sales figures, its cloud and software businesses still seem in a very strong long-term position. 2023 should also see a resolution to the company's bid for Activision Blizzard, which is currently being challenged by the Federal Trade Commission.
Another common link among these three stocks is that they are part of the cloud infrastructure oligopoly. Although cloud growth slowed late last year, an economic downturn may only accelerate companies' decisions to move to the cloud long term, as the cloud saves companies money they'd otherwise need to build their own data centers. Over the long term, the cloud infrastructure-as-a-service sector looks to be a large market with only these three players being able to meaningfully compete, making these three solid choices for the rest of the 2020s.
Now what
It's not often one gets to buy these powerful tech giants at such a discount, but the inflation and rate shock of 2022 has provided that opportunity. While there are other growth stocks down by much more over the past year, many of those businesses are either unprofitable or not very profitable when factoring in stock-based compensation, or their competitive position may be in question now that we are no longer in a world of zero interest rates.
Thus, these defensive cloud and internet giants offer a happy medium between defense and offense, especially after such bad year. It's no wonder they are finding a bid relative to other tech companies as we start 2023.
