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

The Nasdaq MarketSite in the Times Square neighborhood of New York on Tuesday, May 31, 2022.

Michael Nagle | Bloomberg | Getty Images

Tech stocks rebounded from a disastrous 2022 and propelled 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 just above. The gain was also slightly lower than the index’s performance in 2009. Those were the only two years with larger gains dating back to 2003, when stocks were coming out of the Internet crash.

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

Across the sector, the major event this year has been the return of risk, driven by the Federal Reserve’s halt to interest rate hikes and a more stable inflation outlook. Companies also benefited from cost-cutting measures they implemented late last year to focus on efficiency and strengthen profit margins.

“Once you have a Fed that’s going backwards, either, in terms of rate hikes, you can go back to the task of pricing companies correctly – how much money are they making, what kind of multiple to put on it – you,” Kevin Simpson, founder of Capital Wealth Planning, told CNBC’s “Halftime Report” on Tuesday. “This can continue until 2024.”

While the technology industry has received a big boost from the macroeconomic environment and the prospect of lower borrowing costs, the emergence of generative artificial intelligence has sparked excitement in the sector and pushed companies to invest in what is seen as the next big thing.

Nvidia has been the big winner in the AI ​​rush. The chipmaker’s stock price soared 239% in 2023 as large cloud providers and heavily funded startups snapped up the company’s graphics processing units (GPUs), needed for training and running advanced AI models. In the first three quarters of 2023, Nvidia generated net profit of $17.5 billion, more than six times that of the previous year. Revenue in the last quarter tripled.

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

“Startups are racing to create revolutionary products and business models, while incumbents seek to respond,” Huang said at Nvidia’s developer conference. “Generative AI has sparked a sense of urgency in businesses around the world to develop AI strategies.”

“Relatively early stages”

Consumers discovered generative AI through OpenAI’s ChatGPT, which the Microsoft-Microsoft-backed company launched in late 2022. The chatbot allowed users to enter a few words of text and start a conversation that could produce sophisticated responses in an instant.

Developers have started using generative AI to create tools for booking travel, creating marketing materials, improving customer service, and even coding software. Microsoft, Google, Meta And Amazon have touted their massive investments in generative AI by integrating the technology across all product suites.

Amazon CEO Andy Jassy said during his company’s October earnings call that generative AI would likely produce tens of billions of dollars in revenue for Amazon Web Services over the next few years , adding that Amazon uses these models to forecast inventory, establish transportation routes for drivers, help third-party sellers create product pages, and help advertisers generate images.

“We have been surprised by the pace of growth in generative AI,” Jassy said. “Our generative AI business is growing very, very quickly. Almost by any measure, it’s already a pretty big business for us. And yet, I would also say that companies are still at stages relatively early.”

Amazon stock soared 81% in 2023, its best year since 2015.

Microsoft investors have enjoyed a rally this year not seen since 2009, with shares of the software company soaring 58%.

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

“Microsoft’s partnership with OpenAI and subsequent product innovation through 2023 has driven a dynamic market shift,” wrote Michael Turrin, a Wells Fargo analyst who recommends buying the stock, in a note to investors. customers on December 20. “Many now view MSFT as the absolute leader in the early AI wars (even ahead of market share leader AWS).”

Meanwhile, Microsoft has generated profits at a historic pace. In its latest earnings report, Microsoft said its gross margin exceeded 71% for the first time since 2013, when Steve Ballmer led the company. Microsoft has found ways to manage its data centers more efficiently and reduced its reliance on hardware, leading to higher margins for the segment containing Windows, Xbox and Search.

Microsoft CEO Satya Nadella (right) speaks as OpenAI CEO Sam Altman (left) looks on during the OpenAI DevDay event on November 6, 2023 in San Francisco, California. Altman delivered the keynote speech at the first-ever Open AI DevDay conference.

Justin Sullivan | Getty Images

After Nvidia, the biggest stock gain among mega-cap technology companies was in shares of Meta, which jumped almost 200%. Nvidia and Meta were by far the two best performers on the S&P 500.

Meta’s rally was sparked in February, when CEO Mark Zuckerberg, who founded the company in 2004, said 2023 would be the company’s “year of efficiency” after the stock fell by 64% in 2022, largely due to three consecutive quarters of declining revenues.

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

Where are the IPOs?

Like Meta, Uber wasn’t there during the Internet crash. The ride-hailing company was founded in 2009, in the depths of the financial crisis, and became a tech darling in the years that followed, when investors prioritized innovation and growth over profit.

Uber went public in 2019, but has long struggled with the idea that it could never be profitable because so much of its revenue went to paying drivers. But the business model finally started working late last year, both for the ride-hailing and food delivery businesses.

All of this helped Uber hit a major milestone for investors earlier this month, when the stock was added to the S&P 500. Index members must have positive earnings in the most recent quarter and in total over the previous four quarters, according to S&P rules. . Uber reported net income of $221 million on revenue of $9.29 billion for its third quarter, and over the past four quarters in total it has generated more than $1 billion in revenue. profits.

Uber shares hit a record this week and are up 149% for the year. The stock, listed on the New York Stock Exchange, ended the year as the sixth highest gainer in the S&P 500.

Despite 2023’s tech rally, new opportunities have been few and far between for public investors during the year. After a dismal 2022 for tech IPOs, very few names hit the market in 2023. The three most notable IPOs – InstacartArm and Klaviyo – it all took place over a week in September.

For most late-stage IPO companies, there is still work to be done. The public market remains unwelcoming to cash-burning companies that have yet to prove they can be sustainably profitable, a problem for the many startups that have raised mountains of cash over the interest rate free days of 2020 and 2021.

Even for profitable software and internet companies, multiples have contracted, meaning valuations realized in the private market will force many of them to accept a discount when they go public.

Byron Lichtenstein, managing director at venture capital firm Insight Partners, called 2023 “the great reset.” He said companies best positioned for IPOs are not expected to debut until the second half of 2024 at the earliest. In the meantime, they will make the necessary preparations, such as hiring independent board members and IT and accounting expenses to ensure they are ready.

“There is this dynamic between expectations in 2021 and the prices that were paid then,” Lichtenstein said in an interview. “We’re still dealing with a little bit of that hangover.”

—Jonathan Vanian of CNBC contributed to this report

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