Home Enterprise holdings 6 Types of Tech Stocks I’m Loving Right Now…and 4 I’m Wary of

6 Types of Tech Stocks I’m Loving Right Now…and 4 I’m Wary of


Most tech stocks are now trading well below their 2021 highs, but I think only certain types of tech companies are really good deals.

Here’s an overview of the types of tech companies that I believe offer attractive medium to long-term risk/reward at current levels, and which I think are best avoided. As always, investors are advised to do their own research before taking a position.

What I like:

1. Cheap chip vendors with limited exposure to consumer hardware

Shares of companies such as Onsemi (ON), NXP Semiconductors (NXPI) and STMicroelectronics (STM) have plunged to levels that leave them sporting double-digit P/Es, although they still see fairly good demand from core automotive and industrial end markets and are poised to benefit from long-term trends such as EV/ADAS adoption, factory automation and investments in IoT hardware. While these companies may see some customer inventory corrections, the current market pessimism towards them seems overdone.

Similarly, high-margin fabless chip vendors such as Advanced Micro Devices (AMD) and Marvell Technology (MRVL) have seen their forward P/Es drop to mid-teen levels, even as they take shares of competitors and expect to see strong demand from US cloud giants (the proverbial hyperscalers) will continue through 2023.

2. Inexpensive chip vendors with relatively low memory exposure

Companies such as Applied Materials (AMAT) and KLA (KLAC) are now also posting double-digit P/Es, although they remain constrained by supply for now and have signaled that demand will remain strong in 2023.

While weaker demand is expected from memory manufacturers facing significant DRAM and NAND flash memory price declines, this should be more than offset by strong demand coming from healthy demand from foundries ( contract manufacturers) and logic chip manufacturers who constitute a solid majority. sales from companies like Applied and KLA. Additionally, many of these companies are aggressively buying back their shares.

3. Cheap online ad games with unique services/platforms

Thanks in large part to recession fears, companies such as Digital Turbine (APPS) and Perion Network (PERI) are posting double-digit P/Es. This is despite the fact that companies benefit in the long term from advertising dollars shifting from offline to digital channels and have differentiated solutions in key markets – for example, Digital Turbine’s SingleTap platform to promote and enable installs. quick apps on Android devices. without needing to rely on an app store or Perion’s SORT platform to deliver targeted ads without the need for tracking cookies.

If the United States is not expected to enter a truly major recession – and I am cautiously optimistic that we will not, given the state of the labor market and consumer balance sheets /businesses – the risk/benefits of such businesses look pretty good here.

4. Cheap and under-tracked small-cap growth stocks

Thanks in part to the fact that many growth and momentum-oriented investors focus most or all of their attention on large caps, a number of small-cap growth stocks are now available at selling multiples. and/or historically low profits. While not without risk, small cap growth arguably presents great opportunities to swing for the fences at this time.

I wrote about a few small cap growth stocks I like in late August.

5. Cloud software companies beaten with market-leading products

While I’m wary of some popular cloud software stocks (more on that shortly), I think companies with market-leading offerings that trade at deep discounts compared to the sales and billing multiples ‘they usually sported from 2017 to 2019 are worth a look. Companies such as Salesforce.com (CRM), Elastic (ESTC) and Okta (OKTA) come to mind.

Reasons to be cautiously optimistic about these companies (apart from their valuations): Spending on software and cloud services remains a priority/growth area for many companies and (although weaknesses were seen in some regions and certain verticals) earnings reports and conference commentary from major software companies have generally been better than expected over the past two months.

6. 3 out of 5 tech giants

Alphabet (GOOGL), Amazon.com (AMZN), and Microsoft (MSFT) all seem fairly reasonably priced at these levels, given demand trends and their competitive positions.

Due to recession fears, Alphabet has a GAAP forward P/E of just 17, despite its Google Cloud and Other Bets units still weighing significantly on its results. Microsoft’s GAAP forward P/E is 23, which isn’t exactly cheap, but pretty reasonable given the company’s revenue/bookings growth and the sustainability of its core software and of its cloud franchises. And it can be argued that a solid majority of Amazon’s $1.15 trillion market capitalization is now covered by AWS, which (based on FactSet’s consensus estimate) is expected to see a 32% increase in revenue. % this year to reach $82.3 billion and still sees backlog growth far outpacing revenue growth.

(What about Apple (AAPL) and Meta platforms (META) ? I think Apple’s long-term story is still intact, but would prefer a bigger margin for error than what its stock currently offers, especially given the potential headwinds in China and Europe. Meta is cheap enough, but current trends in user engagement, ad sales, and investment look worrisome, as do huge losses and uncertain gains for Meta’s Reality Labs unit.)

What I do not like :

1. Tiered Cloud Software Inventories

Although many cloud software multiples are now quite reasonable, a handful of popular high-growth companies still have forward sales and billing multiples in the 1990s or higher. Consider companies like Cloudflare (NET), Snowflake (SNOW), and Datadog (DDOG).

Soaring interest rates/Treasury yields have particularly hurt valuations of companies like these, as the lion’s share of future cash flows that investors are paying for are expected to arrive several years from now. These cash flows must now be discounted at much higher rates than before.

2. Highly Unprofitable/Speculative EV, AV and Clean Energy Games

Much more so than cloud software, which had a lot of good companies just overvalued, the EV/clean energy and autonomous driving/trucking spaces gave us a lot of Dot-com bubble-like excess. Plus, thanks in part to recent short presses, a lot of that foam still hasn’t washed out.

Remarkably, Rivian (RIVN), Lucid (LCID) and Plug Power (PLUG) – which still have some way to go before becoming profitable – still have over $65 billion in total net worth. Autonomous trucking games such as Aurora Innovation (AUR) and TuSimple Holdings (TSP) also still seem to be highly valued given their cash burn and all the competition they face, as do some LIDAR vendors.

3. Fintechs making subprime loans and/or operating in crowded markets

High interest rates increase financing costs for units like Affirm (AFRM), Upstart (UPST) and Block’s (SQ) Klarna, just as high inflation weighs on discretionary spending by low-income consumers who represent a large part of their clientele.

And looking more broadly at the fintech space, a shake-up seems inevitable after years of rampant funding activity that has led to a number of payments and lending areas being overwhelmed by competition. Some larger fintechs with strong network effects may well weather the storm, as may some point-of-sale (POS) platform providers who benefit from higher travel/hospitality spending. But things could go wrong elsewhere.

4. Most mainstream enterprise hardware vendors

Unlike most other tech companies I’m wary of, traditional enterprise hardware vendors such as HP (HPQ), Hewlett-Packard Enterprise (HPE), and Dell (DELL) typically post low P/Es. But they also feel like value traps in an environment like this.

Public cloud adoption remains a long-term headwind for server and storage sales in on-premises enterprise environments, and IT spend surveys have fairly consistently shown that on-premises hardware is one of the first things to see spending cuts during a macro downturn. Additionally, the delayed ramp-up of Intel’s next-generation server CPU (INTC) platform (Sapphire Rapids) is expected to be a near-term headwind for enterprise server sales.

(AMD, GOOGL, MSFT, AMZN and AAPL are holdings in the Member Club Action Alerts PLUS . Want to be alerted before AAP buys or sells these stocks? Learn more now. )

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