Cramer: Why tech can’t find a bottom as other parts of the market show signs of life

By Eduardo Saverin On Nov 7, 2022

Lots of companies got clocked last week. We saw weakness in a host of industries everything from media to gambling to cloud computing and software sales. The pain in the technology sector seems to know no bounds, as we mark one year ago this month since the Nasdaq last closed at a record high. (To be clear, I am not talking about the Apple (AAPL) release from Sunday evening about the iPhone 14 Pro and Pro Max issues due to a showdown in production due to Covid restrictions in China . That’s because those are supply not demand related.) At the same time, we saw continued, remarkable growth among the industrials. Despite a rough start to November, the Dow jones Industrial Average posted a nearly 14% gain in October for its best month since 1976. There are a lot of ways to gauge industrial strength. Some like to use the rails, and they showed very strong numbers. Some like to use airlines, and they are as strong as I can ever recall them. But to me, I like to soak in the wisdom of Nick Akins, the outgoing CEO of American Electric Power , which happens to be the largest transmission power company in the United States. When I interviewed him this past week on “Mad Money,” I was shocked to learn that his businesses are accelerating with great strength in chemicals and papers, primary metals — and, most importantly, in oil and natural gas extraction. That’s a typical snapshot of the American economy in 2022, an economy that can’t seem to be reined in by Federal Reserve Chairman Jerome Powell, no matter what — even as there is a wholesale slaughter of once-loved stocks. The dichotomy is everywhere. We are getting huge manufacturing growth as well as excellent increases in travel and leisure and all that comes with it. But we have hiring freezes and lay-offs galore in technology, particularly anything connected with software or semiconductors. When you merge industrials with the strength in travel — and the spending that comes with it — you come up with higher prices for consumers on the move and bigger spending once they get where they are going to go. I see not a glint of hope that this spend is coming down. Mastercard (MA), Visa (VA) and American Express (AXP) all confirm that Americans are going out and traveling like rarely before. I think it has to do, once more, with post-Covid pandemic behavior. Occasionally you will hear about some sort of slowdown in travel. I know that there was an attempt to pin down Brian Chesky, CEO of Airbnb (ABNB), on slower spending on more grandiose housing in the fourth quarter. I can tell you from my own digging after speaking with him on “Mad Money” that nothing could be further from the truth: That’s something that Marriott (MAR) and Expedia (EXPE) confirmed. No wonder we continue to see strength in hiring for travel, leisure and entertainment. However, there’s really nothing visible to slow this juggernaut down. Now I am not dismissing the slowdown in housing. That’s so palpable that the folks at Zillow (Z) on their call made sure you knew that it’s a terrible time to buy a house, given the incredible Fed interest rate hikes that we have seen. I know Powell mentioned the “lag” in the fabled 2 p.m. ET statement after the central bank’s November meeting last week — before his portfolio-stuffing press conference. But there is no lag in housing. We also heard some discouraging words about autos from Ernie Garcia, CEO of the incredibly challenged Carvana (CVNA). He sees tough times ahead for used cars. His negative comments sent his stock down nearly 39% on Friday, as many worried he doesn’t have the capital to maintain the pace of sales he envisions and the equity — and even the debt markets may be closed to his company. But you aren’t seeing the kind of weakness that is driving down the main players in industrials. The Carvana and Zillow calls aren’t resonating because the autos and housing companies have already seen their stocks crushed. Which brings me back to the techs that heard CEOs almost in unison say the terms “macroeconomic uncertainty” and “facing headwinds,” over and over on their conference calls. Unlike the housing and auto stocks, these took it right on the chin every single time. Some of the declines we saw were incredibly exaggerated, notably those of Atlassian (TEAM), down nearly 29% on Friday, and Cloudflare (NET), down 18%. Both are excellent companies. But we just aren’t used to seeing companies of this quality ever experiencing slowdowns, because they help companies digitize, automate, develop new software — all of the secular growth areas we can think of. Every buzzword we are used to. I heard the same thing from Appian (APPN), another company that offers enterprise software solutions, and another stock that sank more than 18% on Friday. Heaven knows enough of those were created during boom times — and its stock was crushed when it cut its forecast. I found myself thinking did anyone think they would raise it? Maybe so, because the people who own these stocks and their ilk must have simply not seen the slowdown coming until last week. They abandoned these stocks at a record pace. But the sell-off wasn’t just limited to companies that aren’t used to stumbling. The stock of Twilio (TWLO), which makes terrific customer management and retention software, blew up once again and once again it went sharply lower, down nearly 35% on Friday. Of course, these stocks had been such loved equities that the exchange-traded fund (ETF) creators put together basket after basket of these so they were all linked. Even the best, like ServiceNow (NOW), with a big upside surprise and a 13% pop on Oct. 27, couldn’t withstand the onslaught and gave back that whole gain and then some since then. Contrast that to, say, anything auto or housing that is not digitized and you will see barely a decline if not an outright advance as these stocks are de-risked, meaning that only the braindead or the endlessly-hopeful-of-a-quick-ending to the cycle are still in them. When I drill down on the software failures to see what they mean about headwinds and how they are impacting the companies, I come with data that remains worrisome for everything tech. The first is a problem of what we call “the top of the funnel” meaning that attempts to get customers are slowing. Acquisition of new customers is simply taking longer or being “elongated,” which is the codeword of the moment. Existing customers are being retained at the usual rate, so retention isn’t the problem. But getting them to do more seems like it’s become increasingly difficult. The so-called land and expand just isn’t happening. Fewer are landing and there’s not a lot of expanding, There are some hobbled customers out there. Fintechs aren’t spending; reasonable given how much they have already spent. Crypto companies are on the ropes and their problems extend to the bedraggled media sector. But I think that there’s simply not enough companies being funded or going public that need the software. At the same time, these once-thriving tech companies that saw an ever-expanding funnel somehow didn’t seem to see any of this coming. Most, like Alphabet (GOOGL), were still hiring in the spring and summer. Many have the highest number of employees they have ever had. Their reaction is mostly to freeze hiring, although some are starting to lay people off. The latter is very rare, though. That won’t be the case next quarter, believe me. To me, all of this cuts to sticking with the stocks of companies that either anticipate the weakness, which are the soft goods companies which will benefit tremendously when their raw costs come down next year and the dollar struggles after its incredible run, or the companies that actually are levered to a consumer who remains liquid and likes to spend on smaller luxuries, like cosmetics, Estee Lauder (EL), or ice cold lattes, like Starbucks (SBUX). Now I have focused repeatedly on semis, and you know they need stronger personal computers and servers and gaming and cellphones. If you see those being stronger, let me know. I don’t. But this software sell-off is very reminiscent of the 2001 debacle. The only difference: Many of these companies can be profitable. They just don’t want to be. That’s changing now but not fast enough to handle the moment we’re struggling with and a group of stocks that simply hasn’t yet hit bottom. How does bottom get hit? Like it always does. Mergers and bankruptcies with only those with the money in the banks and the strongest clients getting to where the Fed is done tightening and the customers come back to life. (Jim Cramer’s Charitable Trust is long AAPL, GOOGL, EL, and SBUX. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Jim Cramer at the NYSE, June 30,2022.

Virginia Sherwood | CNBC

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