Keep the faith: Why this analyst is (still) bullish on US big tech stocks
It has been a year to forget for many technology investors. The NASDAQ 100 is down nearly 30% year-to-date. The poster children of this decline, the US FAANG stocks, have been in two bear markets this year already (though the second was far briefer than the first). And don't even start calculating the losses for such names as Cathie Wood. Here in Australia, the news isn't much better with the S&P/ASX 200 All-Technology Index down nearly 30% in the past year.
But one investor's trash is usually another's treasure - and with the possibility of long-term interest rates peaking in the near future, could these tech darlings stage a turnaround?
In this wire, I'll take you through the thesis of one long-term, long-time technology bull who argues that sentiment will end up being no match for strong earnings when the next quarterly reports drop later this month. Plus, he'll name his favourite pick of them all - and his least favourite too.
Why markets now are reminiscent of 2001
Wedbush Securities tech analyst Daniel Ives only remembers two worse periods for sentiment around big tech equities - 2008 and 2001. The concoction of macroeconomic headwinds like rising interest rates, soaring supply chain costs, and the ongoing semiconductor chip crisis has created a volatile landscape.
Then there are the earnings downgrades. Tesla (NASDAQ: TSLA) recently missed its quarterly delivery estimates, sending its stock lower. The miss cost Cathie Wood and her flagship ARK Innovation ETF a lazy US$32 million in a day. Chipmaker Micron (NASDAQ: MU) missed estimates on its most recent sales report and downgraded its earnings guidance.
And both Microsoft (NASDAQ: MSFT) and Alphabet (NASDAQ: GOOGL) have discussed how the relentless strength of the US Dollar is actually crimping their respective earnings. And the correlation is easy to see when you look at the next chart:
Earnings downgrades and warnings are also not good in a market where many investors have been accustomed to big beats and relative perfection in profits. But Ives has a more constructive view - saying it will all come down to the relative outperformance (or underperformance) of earnings:
To this point, we are entering a crucial Q3 earnings season over the next month that will either expose the negative underlying fundamentals across the tech space and cause massive earnings cuts into 2023 along with further multiple compression or prove the bearishness and the demise of growth tech was premature.
So why be bullish?
Ives has been arguing that the macroeconomic headlines are just that - headlines. He argues the noise is clearly distracting right now, with more rate hikes only further deepening the valuation problem for growth-oriented companies like US big tech.
But, like any good contrarian, Ives says this quarter's earnings will likely tell a different story:
We believe the Q3 earnings season will be a positive catalyst for tech stocks and ultimately prove that the fundamentals in pockets of software, cyber security, and some other areas of tech will be better than feared.
Just give us the stock picks already!
I hear you, reader! Here are just a sampling of Dan's top picks - keeping in mind these are all outperform-rated so he's putting his money where his mouth is.
Top software picks - Microsoft, Salesforce (NYSE: CRM), and NICE Ltd. (NASDAQ: NICE)
Top cyber picks - Palo Alto (NASDAQ: PANW), Zscaler (NASDAQ: ZS), and Fortinet (NASDAQ: FTNT)
And the big winner of them all is... Apple (NASDAQ: AAPL). Although the stock's down nearly 20% year-to-date, Ives remains resolute in his belief in Apple's earnings longevity. In a note dated August 17th, he reiterated his lofty forecast for the Cupertino-based business:
On a growth and EBITDA basis, we believe Apple's services business is worth alone north of $1 trillion ... In a nutshell, we believe Apple's growth story remains well intact with clear momentum around iPhone 14 around the corner despite the shaky macro.
And the big loser of them all is... DocuSign (NASDAQ: DOCU) - a company characterised by Ives in recent months as improving, but not quite there yet:
The company gave guidance for Q3/FY23 that was better than feared given some of the underlying softness manifesting at DOCU over the past six months as the company continues to navigate a "growth overhang" post-pandemic in a shaky environment.
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Hans is part of Livewire's content team. He is the moderator and creator of Signal or Noise. He also writes the LW-MI Morning Wrap on Tuesdays and Thursdays.
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