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Most tech stocks are now trading below their 2021 highs, but I think only a handful of tech companies are real bargains.
Here’s a bird’s-eye view of the types of tech companies that I think offer mid-to-long-term attractive/rewards at current levels, and which ones I think are best to stay away from. As always, investors are advised to do their own research before taking any position.
my favorite:
1. Cheap chip suppliers with limited exposure to consumer hardware
Shares of companies like Onsemi ( ON ), NXP Semiconductors ( NXPI ), and STMicroelectronics ( STM ) have fallen to levels that make them sport low-double-digit P/Es. and industrial end markets and are poised to benefit from long-term trends such as EV/ADAS adoption and factory automation and IoT hardware investments. Although these companies may see some corrections in consumer goods, the negative expectations of the market are now excessive.
High-margin fabless chip vendors like Advanced Micro Devices ( AMD ) and Marvell Technology ( MRVL ) have seen future p/s fall into the mid-teens, although they are gaining share from their competitors and expect strong demand from US cloud giants (eg hyperscalers) through 2023. to be continued.
2. Cheap chip equipment suppliers with relatively low memory exposure
Companies like Applied Materials ( AMAT ) and KLA ( KLAC ) currently sport low-double-digit P/Es, even though they remain under supply for now and suggest demand will be strong in 2023.
While weak demand from memory makers related to the decline in large DRAM and NAND flash memory prices is expected, this is more than offset by healthy demand from majority foundries (contract manufacturers) and logic chip manufacturers. Sales of companies such as Applied and KLA. In addition, many of these companies are buying back their shares at a high rate.
3. Cheap online advertising is played through special services/platforms
Companies like Digital Turbine ( APPS ) and Perion Network ( PERI ) have low double-digit forward P/Es thanks to recession fears. Although the companies have long-term benefits from ad dollars moving from offline to digital channels and different solutions in key markets – for example, DigitalTurbine enables a single tap to advertise and promote instant installs on Android devices. Without having to rely on the app store or Perion’s SORT platform to deliver targeted ads without the need for tracking cookies.
Unless one expects the United States to enter a deep recession — and I’m cautiously optimistic that we won’t, given the state of the labor market and consumer/corporate balance sheets — for such risks/rewards. Companies look very good here.
4. Cheap and underperforming small cap growth stocks
Thanks to many growth and momentum investors shifting part or all of their focus to large caps, there are now very few small growth stocks available for historically low sales and/or earnings multiples. Although not without risk, the small-cap boom currently offers some good opportunities to hedge.
In late August, I wrote about a few of my favorite small-cap growth stocks.
5. Beat cloud software companies with market leading products
While I’m keeping an eye out for some popular cloud software stocks (more on that soon), I think companies with market-leading offerings along with the sales and billing multiples they typically sported from 2017 to 2019 are worth a look. Firms like Salesforce.com (CRM), Elastic (ESTC), and Okta (OKTA) come to mind.
Reasons to be cautiously optimistic about these companies (beyond their valuations): Cloud software and services spending remains a priority/growth area for many companies, and (weakness seen in some regions and industry positions) earnings reports and conference commentary for major software companies overall They are better than feared in the last couple of months.
6. 3 of 5 tech giants
Alphabet ( GOOGL ), Amazon.com ( AMZN ) and Microsoft ( MSFT ) all look very well priced at these levels based on demand trends and their competitive positions.
Because of recession fears, Alphabet has a GAAP forward P/E of 17, although its Google Cloud and other betting units still weigh meaningfully on its bottom line. Microsoft’s GAAP forward P/E stands at 23 — not exactly dirt-cheap, but very reasonable given the company’s revenue/bookings growth and the durability of its core software and cloud franchises. And it may be a good thing that most of Amazon’s $1.15 trillion market value is now covered by AWS, which (based on consensus FactSet estimates) expects revenue to grow 32% to $82.3 billion this year and is still seeing a backlog. Growth comfortably outpaces income growth.
(what about Apple (APL) And Meta Platforms (META) ? I think Apple’s long-term history is still intact, but the stock still favors a bigger margin of error than what it’s currently offering, especially given the macro headwinds in China and Europe. Meta is pretty cheap, but current user-engagement, ad-sales, and capex trends look worrisome, as do the heavy losses and uncertain payouts for Meta’s Reality Labs division.)
What I don’t like:
1. High-quality multi-cloud software shares
Although many cloud software iterations are now very reasonable, a handful of popular high-growth companies still have future sales and billings in their teens or older. Consider companies like Cloudflare ( NET ), Snowflake ( SNOW ), and Datadog ( DDOG ).
Interest rates/Treasury yields, which account for the lion’s share of the cash flow investors are paying, will especially hurt the valuations of these companies. These cash flows must be discounted at a much higher rate than previously.
2. Highly profitable non/speculative EV, AV and clean energy plays
Much more than cloud software, it provides companies with good value at scale, the EV/clean energy and autonomous driving/truck spaces have given us plenty of Dot-com bubble-like profits. Also, thanks in part to recent short squeezes, a lot of this bubble still hasn’t washed away.
Remarkably, Rivian ( RIVN ), Lucid ( LCID ) and Plug Power ( PLUG ) — all three of which still have a ways to go before becoming profitable — still have a combined equity value of more than $65 billion. Autonomous truck players like Aurora Innovations ( AUR ) and TuSimple Holdings ( TSP ) are also still burning cash, and the competition they face appears to be as strong as some LIDAR vendors.
3. Fintechs are subprime and/or operating in a crowded market
High interest rates are boosting funding for the likes of Affirm ( AFRM ), Upstart ( UPST ) and Block’s ( SQ ) Klarna unit, just as high inflation weighs on discretionary spending among low-income consumers, taking a big chunk out of them. Customer base.
And looking at the fintech space more broadly, it seems inevitable that it will be engulfed in competition for many areas of payments and lending, following years of booming funding activity. Some large fintechs with strong network effects may weather the storm well, while some point-of-sale (POS) platform providers may benefit from higher travel/hospitalization costs. But things are bound to deteriorate elsewhere.
4. Most traditional enterprise hardware providers
I’d be wary of them because, unlike other tech companies, traditional enterprise hardware vendors like HP ( HPQ ), Hewlett-Packard Enterprise ( HPE ) and Dell ( DELL ) generally sport low P/Es. But in such an environment they feel like value traps.
Public cloud adoption remains a long-term headwind for server sales and storage systems entering enterprise environments, and IT spending surveys show that on-prem hardware is one of the first things to see cost reductions in the macro period. failure. Additionally, the delayed launch of Intel’s ( INTC ) next-gen server CPU platform (Sapphire Rapids) has been a recent headwind for enterprise server sales.
(AMD, GOOGL, MSFT, AMZN and AAPL are holdings in Action Alerts PLUS Member Club . Want to receive an alert before AAP buys or sells these stocks? Learn more now. )
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