Malcolm Ethridge Foresees a Shift in Tech Investment Trends

During a recent CNBC interview, Malcolm Ethridge of CIC Wealth highlighted a shift in investor preference within the tech sector. Ethridge pointed out that megacap tech companies, particularly Microsoft, are now seen as the default trade, overtaking Apple’s previous position. With Microsoft’s revenues up by 13% compared to Apple’s slight decline, the preference for Microsoft reflects investor confidence in its growth trajectory.

Microsoft vs. Apple: The Future vs. The Past

Ethridge argued that while Apple’s narrative has been focused on its past successes, particularly the iPhone, Microsoft is more forward-looking with its emphasis on future developments. He emphasized the potential of Microsoft’s enterprise solutions, especially with the integration of AI technologies like OpenAI’s Copilot, which could make it a leader in a potentially recessionary environment where enterprise spending remains more resilient than consumer spending.

Apple’s Brand and Services Revenue

Acknowledging Apple’s strong brand and trust among younger generations, Ethridge critiqued Apple’s accounting methods within its services revenue. He pointed out that Apple books a significant amount of revenue per iPhone handset sold as services revenue, a move he describes as “fancy accounting.” This double dipping, Ethridge suggests, may inflate the perceived diversity of Apple’s revenue streams.

Alphabet’s AI Hurdles

Turning his attention to Alphabet, Ethridge expressed skepticism about the company’s ability to capitalize on the AI revolution. He posited that Alphabet’s reliance on Google search as its primary product would require a self-cannibalizing strategy to fully embrace AI, a move he deems unlikely given the company’s business model.

Market Sentiment and the Fed’s Role

Ethridge discussed the broader market sentiment, observing that some portfolio managers are taking the chance to invest in tech as window dressing to appear consistently involved in the sector’s growth. However, he cautioned that the market’s confidence could be short-lived if Federal Reserve Chair Jerome Powell leads another interest rate hike in response to inflation metrics, potentially reversing the recent gains in the tech sector.

Portfolio managers window-dressing is a technique used by investment managers to make a portfolio’s performance appear stronger or more attractive than it actually is. It typically involves making temporary adjustments to the portfolio’s holdings or assets just before a reporting period, such as the end of a quarter or year, to create the appearance of better performance. The main objective of window-dressing is to impress clients, potential investors, or regulators by showing a portfolio that appears to have performed well. For example, a portfolio manager may sell underperforming stocks or investments and purchase high-performing ones just before the reporting period to boost the portfolio’s returns. They may also selectively disclose only the most successful investments to highlight their performance. By engaging in window-dressing, portfolio managers aim to attract more clients or additional investments, enhance their reputation, or fulfill certain regulatory or marketing requirements. However, this practice can be misleading as it provides an inaccurate picture of the actual performance and holdings of the portfolio.

Bottom-line: Malcolm Ethridge’s analysis suggests a pivotal change in the tech investment landscape, with Microsoft to surpass Apple as the favored safe haven for investors. He underscores Microsoft’s future-focused approach and enterprise-oriented offerings as key factors in this shift. While Apple’s brand remains strong, Ethridge is critical of its accounting practices, and he remains dubious about Alphabet’s potential to adapt to AI advancements. Investors, buoyed by the current market uptick, should be wary of the Federal Reserve’s commitment to inflation targets, which may lead to further rate hikes and volatility in the markets. This environment presents a complex backdrop for tech investments, where strategic foresight and caution are paramount.