- The broad market sell off in recent weeks has hit tech stock about as hard as the shares of other companies.
- Longtime investors and analysts say that’s created some good opportunities to buy shares in some of the leading names in the sector.
- Many tech stock watchers like the shares of the biggest companies — Amazon, Apple, Alphabet and the like — and argue the sell-off has made those stocks more affordable.
- But others see bargains and good opportunities in smaller names and in particular sectors; among them, companies such as Zoom, Activision-Blizzard, and Nvidia.
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The stock market is in turmoil, and worries about the spread of coronavirus and the health of the economy are rampant.
But while the biggest tech companies, from Amazon to Alphabet, have seen their shares take a beating along with the rest of the market, the tech firms may be better poised to weather the turbulence than other businesses, say some longtime tech investors.
As the market seesaws, some of these investors and analysts told Business Insider they see opportunity amid the chaos — a chance to pick up the tech sector’s blue chips at discounted prices. Not all tech companies are created equal though, and the investors pointed to a few key traits and trends that define the more resilient tech stocks.
“We as long-term investors are seeing some wonderful value opportunities,” said Chris Retzler, the portfolio manager of the Needham Small Cap Growth Fund.
Before bouncing back a bit on Tuesday, global stock markets plunged on Monday in the worst one-day decline since the Great Recession in 2008. In the US, the S&P 500, the Dow Jones industrial average, and the Nasdaq composite all fell by more than 7%. As of the end of the day Monday, all three were off around 20% from their all-time highs, reached just last month.
On the whole, tech stocks have been as likely to be sold off as anything else. Apple, for example, fell 8% on Monday and ended the day down 23% from its record high, set in late January. Alphabet was down 6% on Monday, and Uber dropped 11%.
Meanwhile, the Philadelphia Semiconductor Index, which tracks chip shares, lost about 20% over the past two weeks through Monday.
Some investors see an opportunity to go bargain hunting
Retzler had been expecting a correction back in December and had built up a cash stockpile in his fund to buy stocks on a pullback. The market downturn happened a little later than he expected, but in the wake of it, he’s been investing. Now is a good time to buy up stocks in companies that will likely prosper once the outbreak and associated economic pullback passes, he said.
Coming out of the recovery, chip makers are going to continue to need to innovate, which is going to drive the demand for semiconductor equipment; makers of that equipment will benefit from that, he said. Enterprise corporations may put off or scale back investments in data centers and cloud computing in the short term, due to the economic uncertainty, but they can only push that off for so long. There’s a huge need among such companies for storing, processing, and moving data, he said.
Companies involved in the transmission and processing of video are likely to see a surge in demand as a result of the coronavirus crisis, as companies, individuals, and organizations look for ways to interact virtually instead of in-person, he said.
“It really makes me very bullish as you see all of this,” Retzler said. “It only highlights further the need for that investment on many fronts.”
Many are still bullish on the FAANGs
But he wasn’t the only one seeing long-term bargains in all the wreckage on Wall Street. Like Retzler, Dan Morgan, a senior portfolio manager at Synovus Trust, had been stocking away cash as the market kept rising and the top tech names kept getting more expensive. He’s seen the sell-off as an opportunity to buy some of the top names in tech, such as the so-called FAANG stocks — Facebook, Apple, Amazon, Netflix, and Google-parent Alphabet — as well as companies such as Microsoft and Salesforce.
Some of the companies have been or could be affected in the near-term by the outbreak and the associated economic uncertainty, Morgan said. But he doesn’t think that what’s happening now will lead to a full-blown recession. Most of his thesis about the sector — most notably, the growing importance and construction of data centers — remain intact, he said.
“I think this creates an opportunity for people if they can be disciplined, he said. “Six months, a year down the road,” he continued, “I think you’ll find that there were some great opportunities in the markets to take advantage of some really good stocks that had been knocked back.”
Likewise, analyst Steve Allen of S2C Partners thinks the FAANG stocks will largely weather the storm, except for Apple which is getting hit on both its consumer sales and on its manufacturing.
“Amazon gets hurt on supply, but might gain as Walmart, et al might suffer,” Allen said. “Google and Facebook are online, so only suffer from a pullback from advertisers. Netflix definitely gains as movie goers stay home to watch movies at home.”
Consumers and workers are likely to spend more time at home
Investors and analysts were finding market opportunities not just among the tech giants, but in particular sectors of the industry.
Among the areas of the industry that are likely to do best amid the outbreak are those that help consumers entertain themselves at home, said Jonathan Mzengeza, the portfolio manager at CIBC Asset Management’s technology fund. Video game publishers such as Activision-Blizzard and video streaming services such as Netflix are likely to see a boon from consumers wanting to avoid the disease by staying in their own abodes, he said.
“Those are the kind of things that I think will do positively,” Mzengeza said.
E-commerce companies such as Amazon may have to deal with supply issues for products in the short-term, he said. But longer term, the outbreak could encourage greater consumer spending online, he said.
“It may change behavior,” he said. “Instead of driving out to the mall, [consumers] will rather order things to get delivered from home.”
Another sector that’s likely to hold up is the software-as-a-service area. Those kinds of companies offer internet-based business applications on a subscription basis. They’ll likely bounce back quickly from any downturn, especially those that can help their clients reduce their costs, said Martin Wolf, president of Martinwolf M&A Advisors.
In particular, he and other analysts expect companies that offer cloud-based communications services, including Zoom Video Communications and Slack, to hold up well during all this upheaval. Zoom’s stock sold off on Tuesday, but its shares have actually risen in recent weeks as the outbreak has worsened.
For his part, JMP Securities analyst Patrick Walravens said he’s betting on Bandwidth,the North Carolina-based cloud communications company, which he said is “one of our highest conviction names in our universe presently given the uncertainty associated with the COVID-19 situation.”
Some chip companies could be good bets
And some bigger companies that cater to enterprises could hold up well too. Wedbush analyst Daniel Ives said his own list of “top defensive names” — the companies he expects to suffer the fewest impacts of the downturn — includes Microsoft and Adobe. He pointed to the two tech giants’ “recurring and massive installed bases” of users.
Ives also touted Nuance Communications, the AI and speech recognition software company, whose emerging healthcare cloud platform has been winning rave reviews.
The big hit to semiconductor stocks has driven prices down in that area, but Bernstein Research analyst Stacy Rasgon cautioned about investing heavily into the sector right now for fear that the current downturn might degrade into a recession.
Still, he said, some of the chip stocks are looking attractive, price-wise, and are worth considering. Among them: NXP Semiconductor, the American Dutch company known for making automotive and networking processors, and Broadcom, which makes chips for communications gear and data centers.
Both Rasgon and Matthew Bryson of Wedbush recommended Nvidia, the gaming chip maker which is also expanding its footprint in data centers. Bryson also likes AMD, an Nvidia rival which is also strong in the gaming and data center markets. AMD has been gaining share in the data center market against longtime rival Intel which has struggled with production issues and downbeat reviews of some of its recent products.
Unlike Intel which makes chips in its own factories, known as fabs, AMD is a “fabless” semiconductor company which relies on third party manufacturing companies. That’s a positive in the chip industry that’s reeling from a downturn in demand, Bryson said.
“In the [semiconductor] world, companies with less capital intensity tend to be safer in downturn, with no significant depreciation that will weigh on both gross and operating margins,” Bryson said.
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