Tech stocks just completed one of their best years in the last two decades after 2022 crash

Tech stocks bounced back from a disastrous 2022 and led the Nasdaq to one of its strongest years in the last two decades.

After falling 33% last year, the tech-heavy Nasdaq finished 2023 up 43%, its best year since 2020, which was much higher. This gain was slightly lower than the index’s performance in 2009. Those are the only two years with big gains since 2003, when stocks were coming out of the dot-com crash.

The Nasdaq is now just 6.5% below its record high in November 2021.

Across the industry, the big story this year was a return to risk-on, driven by the Federal Reserve pausing its interest rate hikes and a more stable outlook on inflation. Companies also benefited from cost-cutting measures introduced late last year to focus on efficiency and increase profit margins.

“Once you have the Fed that is stepping back in terms of raising rates, you can get right back into the business of pricing companies – how much money do they make, what kind of multiplier do you put on it.” ,” Simpson, founder of Kevin Capital Wealth Planning, told CNBC’s “Halftime Report” on Tuesday. “This may continue until 2024.”

While the tech industry got a big boost from the macro environment and the prospect of lower borrowing costs, the emergence of Generative Artificial Intelligence added excitement to the sector and prompted companies to invest in it as the next big thing.

NVIDIA AI was the big winner in the rush. The chipmaker’s share price surged 239% in 2023 as big cloud vendors and heavily funded startups snapped up the company’s graphics processing units (GPUs), which are needed to train and run advanced AI models. In the first three quarters of 2023, Nvidia expects net income of $17.5 billion, six times more than the previous year. Revenue tripled in the latest quarter.

Nvidia CEO Jensen Huang said in March that AI’s “iPhone moment” had begun.

“Startups are racing to create disruptive products and business models, while incumbent companies are trying to respond,” Huang said at Nvidia’s developers conference. “Generative AI has created a sense of urgency in enterprises around the world to develop AI strategies.”

Consumers learn about generative AI thanks to OpenAI’s ChatGPT, which Microsoft-Backed company Released in late 2022. Chatbots allow users to type a few words of text and start conversations that can generate sophisticated responses in an instant.

Developers began using generative AI to create tools for booking travel, creating marketing materials, enhancing customer service, and even coding software. Microsoft, Google, meta And Amazon Generic explained their heavy investments in AI as they embed the technology into product suites.

Amazon CEO Andy Jassy said on his company’s earnings call in October that generative AI will generate billions of dollars in revenue for Amazon Web Services over the next few years. He said Amazon will use AI to forecast inventory, establish transportation routes, and more. Using the model for. Drivers help third-party vendors create product pages and advertisers create images.

“We are amazed at the pace of development in generative AI,” said Jassy. “Our generic AI business is growing very rapidly. By almost any scale it’s already a pretty significant business for us. And yet I would also say the companies are still relatively early stage.”

Amazon shares climbed 81% in 2023, their best year since 2015.

Microsoft investors enjoyed a rally this year unlike any seen since 2009, with shares of the software company climbing 58%.

In addition to its investment in OpenAI, Microsoft integrated the technology into products such as Bing, Office, and Windows. Copilot became the brand for its comprehensive generative AI service, and CEO Satya Nadella last month described Microsoft as “the Copilot company.”

“Microsoft’s partnership with OpenAI and subsequent product innovation through 2023 has resulted in a dynamic change in the market,” Wells Fargo analyst Michael Turin, who recommends buying the stock, wrote in a Dec. 20 note to clients. “Many now see MSFT as the outright leader in the early AI wars (even ahead of market share leader AWS).

Meanwhile, Microsoft is making profits at a historic rate. In its latest earnings report, Microsoft said its gross margin exceeded 71% for the first time since 2013, when Steve Ballmer was running the company. Microsoft has found ways to run its data centers more efficiently and reduce reliance on hardware, resulting in higher margins for the Windows, Xbox and Search segments.

After Nvidia, whose shares had the biggest stock pop among mega-cap tech companies meta, which jumped nearly 200%. Nvidia and Meta were the two top performers in the S&P 500 so far.

Meta’s rally began in February, when CEO Mark Zuckerberg, who founded the company in 2004, said the stock would decline 64% in 2022 after three consecutive quarters of revenue declines in 2023. “Year of Efficiency”.

The company cut more than 20,000 jobs, proving to Wall Street that it was serious about streamlining its expenses. Growth then returned as Facebook gained market share in digital advertising. In the third quarter, Meta recorded an expansion of 23%, its fastest growth in two years.

like meta, uber Dot-Com was not around during the crash. The ride-hailing company was founded in 2009 during the depths of the financial crisis, and became a tech darling in the years that followed, as investors prioritized innovation and growth over profit.

Uber went public in 2019, but long struggled with the perception that it could never be profitable because most of its revenue went to paying drivers. But the economic model finally started working for both its rideshare and food delivery businesses late last year.

All of this allowed Uber to achieve a major investor milestone earlier this month, when the stock was added to the S&P 500. According to S&P rules, index members must have positive earnings in the most recent quarter and the preceding four quarters. , Uber reported net income of $221 million on revenue of $9.29 billion in its third quarter, and over the last four quarters combined, it made a profit of more than $1 billion.

Uber shares hit a record high this week and have jumped 149% over the year. The stock, which is listed on the New York Stock Exchange, ended the year as the sixth-biggest gainer in the S&P 500.

Despite the tech rally in 2023, there was a lack of new opportunities for public investors during the year. After a disappointing 2022 for tech IPOs, very few names hit the market in 2023. Three most notable IPOs – instacartarm and Clavio – This all happened over the course of a week in September.

For most companies that are late in the IPO pipeline, more work needs to be done. Public markets remain reluctant to burn cash for companies that have not yet shown they can be sustainably profitable, which is a problem for many startups that spent the zero-interest days of 2020 and 2021. A mountain of cash has been raised during this period.

Even for profitable software and Internet companies, many of the companies have contracted, meaning that the valuations startups achieved in the private market will need to be cut if many of them go public.

Byron Lichtenstein, managing director of venture firm Insight Partners, called 2023 the “great reset.” The companies best positioned to IPO are not likely to launch until the latter half of 2024, he said. In the meantime, they will make the necessary preparations, such as appointing independent board members and spending on IT and accounting to ensure they are ready.

“You have this dynamic of where the expectations were in ’21 and what prices were paid at that time,” Lichtenstein said in an interview. “We’re still dealing with that hangover a little bit.”

—CNBC’s Jonathan Vanian contributed to this report

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