3 Observations of Tech Investing in 2021 + 3 Things to Look for in Tech Investing in 2022

2021 has come and gone and it has been an overall turbulent year for a tech stocks in General. Ultimately, we saw the tech heavy NASDAQ held on to gains of 23.2%, slightly underperforming the broader S&P500 that closed with gains 28.8% for the year.

As we start the year afresh in 2022, here are some of my key observations from 2021 and also what could be in store for tech investors in 2022.

Observation 1 - Capital Recycling to Pandemic Reopening Plays

One can hardly argue, that the market in the past 2 years have been one that has been heavily influenced by the global pandemic. When we moved into 2021, we began with a lot of enthusiasm with vaccine availability and the hope that life could return to normal. The markets similarly reflected this sentiment with a violent sell-off of tech-stocks that saw massive business tailwinds during the height of the pandemic. Money moved into stocks that were expected to benefit fromeconomic reopening as we looked forward to going back to normal. 

Observation 2 - Big Tech vs. Rest of Tech

Amidst the turbulence in tech stocks, it is interesting to note that Big Tech like Microsoft (+118.6%), Apple (+37.2%), Alphabet (+67.4%) and Nvidia (+124.3%) held up very well whereas smaller growth tech that were star performers during the pandemic tech boom such as Zoom (-48.9%), Docusign (-31.5%) and Twilio (-21.3%) were decimated. It would seem, even in the tech space, the market is making the distinction between those that will continue to benefit from reopening vs. those that the market believes won't live up to expectations when the pandemic blows over.

Observation 3 - Tech Stocks Priced for Perfection

Many tech stocks entered 2021 with nosebleed valuations and with it came astronomical expectations. The slightest miss on a KPI or cautiousness in management business forecast have often resulted in the stock being punished. Fiverr saw its stock fall by 27% after Q2 2021 earnings and Docusign fell by about 42% after Q3 2021 earnings are just some of the cases in point. 

So what could be in store for tech investing in 2022? Personally, here are some of the things I would be anticipating.

Anticipation 1 - Extreme Volatiliy in High Growth Tech to Continue

While valuations for tech have come down somewhat, there are still quite a few of the high growth tech stocks that continue to enjoy generous valuations. Cloudflare (+76.3% in 2021; PS Ratio: 69), ZScaler (+63.8% in 2021; PS Ratio: 58) and Datadog (+95.2% in 2021; PS Ratio 62) are just some examples. If 2021 was a lesson, I would be anticipating some pretty extreme levels of volatility here.

Anticipation 2 - Valuation Pressures in High Growth Tech

We have all been told of the Fed's asset purchase tapering and also interest rate hikes coming in 2022. This will inevitably place a lot of pressure on current stock valuations with high growth unprofitable tech stocks expected to bear the brunt of this. It would not be surprising if such headwinds lead to another year of underperformance for tech stocks in 2022.

Anticipation 3 - Tech Megatrends to Continue Apace

While tech stocks may well see a tough 2022, tech and its associated megatrends are not going anywhere and are almost certainly going to see continued growth. Where some tech stocks may be punished due to slowing growth, it is worth remembering that this "slow growth" is on top of what they grew during the pandemic. In my view, being able to grow at a decent pace after a year of eye-popping acceleration is a positive sign and no reason to panic.

As a long term investor myself, I would be looking forward to the coming year. It may well turn out to be an excellent year for some shopping to add quality names to my portfolio.

Here is wishing everyone a prosperous 2022 ahead!