Technology and digital media are high-quality sectors that already trade at elevated valuations, leading to an asymmetric risk-return profile (that is, limited upside and comparatively greater downside risk).
Tech companies may use their fortress balance sheets to pursue new market opportunities through mergers and acquisitions (M&A), to the detriment of creditors. The recently announced Oracle-Cerner transaction is a good example.
5G is contributing to high demand for semiconductors today, but we are concerned that the massive supply response will overshoot demand and lead to an inventory-led correction.
Today’s dominant technology companies won’t necessarily be the winners in 5G applications. Asian markets have a head start and will be more competitive during this cycle.
Regulatory scrutiny is elevated. In the 5G era, tech incumbents will have less latitude to buy rising threats (such as Facebook/Instagram and Alphabet/YouTube).
If regulatory curbs, global competition, and excess capacity slow growth, firms may resort to using their balance sheets to drive earnings-per-share growth, which would entail moving down in credit quality.