After a terrible 2022, tech stocks recovered, helping the Nasdaq experience one of its best years in the previous 20 years.

The tech-heavy Nasdaq ended 2023 up 43%, its best year since 2020, which was marginally higher, following last year’s 33% decline. Additionally, the gain fell slightly short of the index’s 2009 performance. Those are the only two years with bigger gains dating back to 2003, when stocks were coming out of the dot-com crash.

As of right now, the Nasdaq is only 6.5% below its all-time high set in November 2021.

This year, the industry saw a return to risk as a result of the Federal Reserve stopping its interest rate hikes and a more stable inflation outlook.

The cost-cutting strategies that businesses implemented beginning in late 2018 to concentrate on efficiency and increase profit margins also helped them.

“Once you have a Fed that’s backing off, no mas, in terms of rate hikes, you can get back to the business of pricing companies properly — how much money do they make, what kind of multiple do you put on it,” Kevin Simpson, founder of Capital Wealth Planning, told CNBC’s “Halftime Report” on Tuesday. “It can continue into 2024.”

The macroeconomic climate and the possibility of cheaper borrowing costs gave the tech industry a significant lift, but the rise of generative artificial intelligence stoked enthusiasm and encouraged businesses to put money into what is thought to be the next big thing.

The clear winner of the AI rush was Nvidia. As major cloud vendors and well-funded startups snatched up the company’s graphics processing units (GPUs), which are required to train and execute sophisticated AI models, the chipmaker’s stock price shot up 239% in 2023. Nvidia’s net income for the first three quarters of 2023 was $17.5 billion, more than six times what it was in the same period the previous year. The most recent quarter’s revenue tripled.

The CEO of Nvidia, Jensen Huang, declared in March that AI had reached its “iPhone moment.”

“Startups are racing to build disruptive products and business models, while incumbents are looking to respond,” Huang said at Nvidia’s developers conference. “Generative AI has triggered a sense of urgency in enterprises worldwide to develop AI strategies.”

Thanks to OpenAI’s ChatGPT, which the Microsoft-backed firm debuted in late 2022, consumers became aware of generative AI. With just a few text sentences, users could initiate a discussion with the chatbot that would instantly generate intelligent responses.

Using generative AI, developers have been able to produce tools for marketing, customer support, travel booking, and even software development. Microsoft, Google, Meta, and Amazon boasted about their substantial investments in generative AI, integrating the technology throughout their product lines.

During the company’s October earnings call, Amazon CEO Andy Jassy stated that generative AI is expected to bring in tens of billions of dollars for Amazon Web Services in the coming years. He also mentioned that the models are being used by Amazon to forecast inventory, plan driver routes, assist third-party sellers in creating product pages, and assist advertisers in creating images.

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

2023 saw an 81% increase in Amazon shares, its highest level since 2015.

This year, Microsoft investors experienced a surge in value that had not been seen since 2009, when the software company’s shares increased by 58%.

Microsoft not only invested in OpenAI, but also incorporated the technology into its Windows, Office, and Bing products. The business’s extensive generative AI service is now branded as Copilot, and CEO Satya Nadella referred to Microsoft as “the Copilot company” last month.

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

Microsoft, meanwhile, has been producing profits at a historically high rate. Microsoft stated in their most recent earnings report that, for the first time since Steve Ballmer took over as CEO in 2013, the company’s gross margin surpassed 71%. Microsoft’s data centre operations are now more efficient, and the company is relying less on hardware, which has increased margins for the Windows, Xbox, and search segments.

The largest stock market surge amongst mega-cap tech companies was seen in Meta’s shares, which surged by about 200%, after Nvidia. In the S&P 500, Nvidia and Meta were the two best performers by a wide margin.

The company’s 2004 founder and CEO, Mark Zuckerberg, declared in February that 2023 would be the company’s “year of efficiency” after the stock fell 64% in 2022, mostly as a result of three consecutive quarters of declining sales. This announcement set off Meta’s surge.

The corporation demonstrated to Wall Street that it was serious about reducing costs by laying off more than 20,000 employees. Then, when Facebook gained market share in digital advertising, growth resumed. Meta saw growth of 23% in the third quarter, the largest gain in the previous two years.

Uber was not in existence during the dot-com bust, just like Meta. The ride-hailing business was established in 2009, at the height of the financial crisis, and in the years that followed, as investors prioritised growth and innovation over profits, it rose to prominence in the tech world.

Uber defied the long-held belief that it could never turn a profit since so much of its earnings went to compensating drivers by going public in 2019. However, the economic strategy for its food delivery and ridesharing operations only started to make sense late last year.

Due to all of that, Uber was able to reach a significant investor milestone earlier this month when its stock was included in the S&P 500. S&P’s standards require that members of the index show positive earnings for each of the last four quarters combined, as well as for the most recent quarter.

Uber’s third-quarter net income was $221 million on $9.29 billion in revenue; during the course of the previous four quarters, the company made over $1 billion in profit.

This week, Uber’s stock reached a record high and increased 149% year over year. The New York Stock Exchange-listed stock was the sixth-biggest gainer in the S&P 500 at year’s end.

There weren’t many new chances for public investors in 2023, even with the tech sector surging. Very few names hit the market in 2023 following a disastrous IPO year for tech in 2022. Instacart, Arm, and Klaviyo, the three most prominent IPOs, all happened in a single week in September.

There is still more work to be done for the majority of late-stage companies in the IPO pipeline. For cash-burning enterprises that haven’t proven they can be profitably sustainable, the public market is still unwelcoming. This presents a challenge for the numerous startups that raised large sums of money during the zero-interest days of 2020 and 2021.

Multiples have shrunk, even for lucrative software and internet companies; therefore, many of the entrepreneurs who reached this valuation in the private market may have to accept a lower valuation when they go public.

2023 has been dubbed “the great reset” by venture capital firm Insight Partners’ managing director, Byron Lichtenstein. According to him, the firms most suited for initial public offerings won’t likely make their debuts until the latter part of 2024.

They will be appointing independent board members and allocating funds for accounting and IT in the interim to ensure they are prepared.

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

(Adapted from BeamStart.com)

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