For the most part, rising interest rates are negative for high-valued technology stocks. Higher interest rates make the present value of company future cash flows less valuable, and most technology companies are valued on the basis that a large chunk of their profits will come many years in the future. However, the higher interest rates are boosting the interest income for the biggest technology companies that carry higher cash balances and smaller debt.
According to Bloomberg data, the largest U.S. technology companies, including Apple (AAPL), Alphabet (GOOGL), and Nvidia (NVDA), entered Q3 with more than a half-trillion dollars in potentially high-yielding cash. Tesla (TSLA) last week said its interest income rose above $250 million in its most recent quarter after being close to zero for years, while Alphabet saw its interest income almost double to more than $1 billion. While the amounts are small relative to overall earnings, interest income offsets the narrative that rising interest rates are universally bad for loftily-valued technology stocks.
Some analysts believe that rising interest rates are not as detrimental to large technology companies as they are to smaller ones. Yardeni Research said big technology companies “are not affected by rising interest rates because their debt is relatively small relative to their cash flow, and they are also sitting on a lot of cash that is earning 5% or more. Also, the idea that rising interest rates are bad for growth stocks, especially technology companies, needs to be reassessed here to recognize that’s not necessarily true if they happen to be very profitable companies with stellar balance sheets.”
While megacap technology stocks may still be profitable despite soaring interest rates, the same can’t be said for their smaller peers. The Nasdaq 100 Stock Index ($IUXX) (QQQ) has outperformed the small-cap Russell 2000 by 39 percentage points so far this year, on track to be the widest margin since 1999. Rising interest rates make refinancing debt more costly. The refinancing risks for smaller technology stocks are higher than that for megacap technology stocks. RBC Capital Market research shows just 2% of companies in the S&P 500 ($SPX) (SPY) had weighted average maturities in the two-years-or-sooner timeframe at the end of Q2 versus 10% among small-cap companies.
Although interest expenses for S&P 500 companies have gone up, the largest companies can still be profitable even with higher interest rates. According to Ned Davis Research, Meta Platforms, Microsoft, Adobe, and Nvidia have made $979 million more in non-operating income in the past four quarters through June than they spent on interest expenses. BlackRock’s head of thematic strategy for global allocation said, “We need to look at companies today and take a good look at each of their own balance sheets, each of their own financing, and each of their own cash-flow prospects instead of saying with a knee-jerk reaction that higher interest rates are a bad thing for higher-multiple or growth companies.”
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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
