5 places to find deals as the tech industry sees its accounts


After month after month of speculative excess, we seem to finally see a math for multi-level tech stocks in the wake of Jerome Powell & Co.’s recent hawkish turn – a math that’s potentially made worse by margin calls, options. blown the bets and redemptions of funds.

Despite the carnage this week and the Friday afternoon Nasdaq rebound to its lows, I’m not sure we’ve hit bottom yet, especially in light of Friday night’s crypto drop. The valuations of many 2021 growth investor favorites are still high, and it wouldn’t surprise me if we need more capitulation in names like Tesla (TSLA), Lucid (LCID), Rivian (RIVN) and Cloudflare ( NET) – many of them are still trading well above what they were a few months ago and / or have recently experienced parabolic acceleration fueled by speculators looking to quickly make big gains on their stocks and their purchase options. A real capitulation in the stocks of memes might also be necessary.

But that said, valuations look reasonable for a lot of other tech stocks right now. It’s not just that the multiples of many names are low or at least moderate: demand trends still look healthy in many tech end-markets, consumer and business spending looks generally good through 2022, and longer-term treasury yields have actually fallen since Powell shared his comments on inflation and declining asset purchases on Tuesday.

That’s why – as someone who has been voicing both bubble and inflation issues for some time – I’ll be the first to say that there are big differences between the current technological environment and the one that existed. in 2000. Similarities in terms of speculative excess and get-rich-quick behavior, multiple inflation is not as prevalent in tech this time around (at the time, practically everything from small caps to tech giants of the day regularly sported triple-digit P / E’s).

Additionally, 10-30 year Treasury bond yields are much lower today than they were then, and likely will remain so even if the Fed hikes rates several times next year. . And perhaps more importantly, there is nothing on the horizon that looks set to crush technology by spending the way the Dot.com and telecommunications bubble collapse led to purchases of computer equipment. and telecommunications (and the various chips and components used in these products) to drop in 2000 and 2001.

For these reasons, what we are currently seeing among growth stocks, memes stocks, and cryptos might look better like a narrower version of the 1987 crash – a rapid and violent slowdown that was sparked by bad macro / political news. and that took a lot of scum in the financial markets, after which many stocks gradually rebounded – only the dot.com/telecom bubble implosion. If so, there’s a good chance we haven’t reached the end of the slowdown (and of course, one shouldn’t forget that much of the 1987 crash happened on a Monday), but also that we may not have many trading days left before the trough.

With all of that in mind, here are some parts of the tech industry where I believe stocks with compelling risk / rewards can be found for those willing to put up with additional short-term volatility. As always, investors are advised to do their own research before taking a position in any of the companies mentioned.

1. Consumer tech companies beaten

Investors flocked to many former beneficiaries of the pandemic, beating their stocks to new 52-week lows after companies generally reported during the third-quarter earnings season that they saw growth slow as consumers were starting to go out more.

But dwelling on these short-term headwinds has led many investors to overlook the strength of the long-term, age-old growth engines that many of these companies still possess. These growth drivers, such as the adoption of e-commerce / digital payments, the adoption of distance learning, and the migration of video ad dollars to online channels, leave these companies well positioned to continue to showcase a healthy double-digit growth over the next few years.

The first names I like: Chegg (CHGG), PayPal (PYPL), Pinterest (PINS), Peloton (PTON), Roku (ROKU)

2. Technical reopening games

The reopening of the rooms is sort of in a “damn if you do, damn if you don’t” moment. While former beneficiaries of the pandemic have been hurt by the normalization of consumer behaviors, tech companies that benefit from higher spending on travel, restaurants and local events are also often trading well below their 52-week highs because fears of the Omicron variant lead to yet another episode of pressure selling.

The massive sell-offs occurred even though many of these companies were already trading at moderate valuations that only took into account gradual recoveries in demand. And they continued even as signs have emerged that many of the first documented cases of Omicron are mild and that the vaccines / boosters still appear to offer great protection against serious illness. As a result, the multiples currently awarded to many reopening coins could look like good deals six months from now.

The first names I like: Reservation (BKNG), Eventbrite (EB), Expedia (EXPE), Lyft (LYFT)

3. Moderate growth software companies

This is an area where deals have opened recently, thanks both to massive after-profit sales and the extent to which shares of cheaper software have fallen in tandem with their wealthier peers.

Either way, the spending growth drivers of the best-positioned enterprise software companies look as good as they did at the start of the year: software continues to take IT’s share of the budget over hardware; investments in software areas such as analytics, security, collaboration and data warehousing remain strategic priorities; and cloud / SaaS adoption is steadily fueling share gains for some companies and gradually increasing spending on enterprise software in various end markets.

Names I like at current levels: Nutanix (NTNX) , RingCentral (RNG) , Salesforce.com (CRM) , Splunk (SPLK)

4. Low Multiple Chip Developers

Despite all the good news the chip industry has experienced this year, many chip developers are being evaluated as if they are pure cyclical games or close to it. Forward P / Es below 20 are still not hard to find for well-positioned chip developers with high margins and differentiated products, while memory manufacturers show forward P / E’s below 10.

But while cyclicality and inventory builds / fixes remain realities for the chip industry, it’s hard to ignore how many trends like increasing cloud investment, adoption of EVs, Proliferation of IoT devices and the growing computing, memory, analog and / or RF requirements of various products are expected to grow the pie in this decade, although we inevitably have downward cycles along the way. The story of long-term growth here is something very different from what exists for, say, the oil industry.

The first names I like: Broadcom (AVGO), II-VI (IIVI), Micron (MU), Qualcomm (QCOM), Skyworks (SWKS)

5.Low multiple / high margin chip equipment manufacturers

Much of what applies to chip developers also applies to chip equipment manufacturers. While the up and down cycles will continue to impact these companies, they are expected to benefit this decade from both increased demand for chips and (in part due to the incredible technical complexity of advanced manufacturing processes) greater investment intensity in industry. In addition, chip equipment sales will benefit over the next few years from efforts to address major supply shortages (especially for advanced processes) and to locate a greater portion of chip production. .

Nonetheless, quality chip equipment companies with P / Es below 20 are still easy to find. Of these companies, I generally prefer companies with relatively high gross margins (i.e. above 40%) because their profits are generally less vulnerable to massive declines during a down cycle.

The first names I like: Applied materials (AMAT), Axcelis Technologies (ACLS), KLA (KLAC), Kulicke and Soffa (KLIC)

One final comment: Some of the companies I have mentioned in this column as being valued are profitable and can be valued based on their short-term EPS or Free Cash Flow (FCF). Others, however, are generating little to no profit as of yet and should be evaluated based on their sales or billing. In a market environment like this, where the greatest selling pressure is often found in companies whose valuations are heavily dependent on expectations of strong earnings growth in the coming years, companies that are moderately valued on the basis of short-term BPA / FCF expectations could offer a greater margin of safety.

(SWKS, AMAT and CRM are participations in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells these stocks? Find out more now.)

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