Tech Stocks Got Hit Hard. Where to Find Bargains Now.
The technology sector may not be on sale, but it certainly has gotten cheaper lately.
4 min
Major technology stocks like Apple (ticker: AAPL), Alphabet (GOOGL), Microsoft (MSFT), and Meta Platforms (FB) are down 10% to 17% from their 2021 highs.
But highfliers in the tech sector and elsewhere like Snap (SNAP), Zoom Video Communications (ZM), Roku (ROKU), Zillow Group (Z), and Teladoc Health (TDOC) are more than 50% and in some cases 75% off their peaks of last year. The selloff has been particularly severe in unprofitable companies that had been valued at elevated multiples of more than 10 times sales.
Investors may want to consider some of the tech leaders and bottom fish among the busted growth stocks.
Mark Stoeckle, manager of the Adams Diversified Equity (ADX), a $2.5 billion closed-end fund, favors the industry leaders including Alphabet, Meta Platforms (formerly Facebook), and Amazon.com (AMZN).
“Investors aren’t making a big enough distinction between the megacap tech stocks and the hair-on-fire multiples of revenue tech stocks,” he says. “The big tech stocks are trading at much lower valuations and are generating immense amounts of free cash flow.”
The Adams fund, whose shares trade at $18, a roughly 13% discount to its net asset value, has sizable stakes in the tech giants.
Take Alphabet. Its class C shares (GOOG) are off 0.4% to $2658.26 Friday and are down about 10% from their late 2021 highs. Alphabet is valued at 23 times projected 2022 earnings of $114 a share.
That price-to-earnings ratio arguably overstates its valuation because Alphabet is losing about $8 a share annually at its Other Bets and cloud computing businesses that are valuable but are absorbing a lot of investment spending. Strip out those losses and adjust for Alphabet’s net cash of more than $125 billion, and the effective 2022 P/E is closer to 20 for a company that is expected to generate 17% revenue growth this year.
Meta Platforms, whose shares were down 2.3%, to $309.42, Friday, trades for 22 times projected 2022 earnings of $14 a share. Those profits are after enormous spending, including $10 billion on the metaverse. If CEO Mark Zuckerberg weren’t investing so heavily, Facebook profits would be much higher.
“I don’t know if the metaverse is going to work, but with Facebook you’re getting an incredibly durable core business throwing off a lot of cash and an option on the metaverse,” Stoeckle says.
Amazon has been hit the hardest among the tech giants. Its shares at $2,937, are off over 3% Friday and down more than 20% from its 2021 peak. Investors fear that it was a stay-at-home beneficiary whose growth may slow as the economy continues to reopen.
Amazon is no bargain at about 60 times projected 2022 earnings of $50 a share, but some investors separate its market-leading cloud computing business, Amazon Web Services, from the retail operations. AWS could generate $80 billion of revenue this year, up from an estimated $62 billion in 2021 and the business could be worth $1 trillion, meaning that investors may be paying just $500 billion, or little more than one times sales for the core retail business and a growing and lucrative ad business.
Apple and Microsoft both have dominant franchises and fetch close to 30 times projected 2022 earnings.
Netflix (NFLX), whose shares were being pummeled Friday, falling 24%, or $121, to $387.06, is getting more appealing from a valuation standpoint. The company’s guidance for subscriber growth in the current quarter of 2.5 million was way below expectations of 5.7 million and analysts have cut earnings estimates for both 2022 and 2023.
It trades for about 34 times projected 2022 earnings and 25 times estimated 2023 profits after its shares gave back all their gains of the past four years. The 2022 and 2023 estimates are from Evercore ISI analyst Mark Mahaney who took down his projections in the wake of the Netflix profit report Thursday. He cut his rating to In-line from Outperform and reduced his price target to $525 from $710 a share.
Among the former favorites, Zoom Video, whose shares were down 1.9%, to $152.81, on Friday, is roughly a third its 2021 peak. Unlike others, Zoom Video is profitable and trades for about 35 times projected 2022 earnings. Roku, which was off 7.7%, to $154.51, Friday, is still unprofitable and trades for around six times projected 2022 sales. Teladoc, at $74.53, was off 2.2% Friday and down over 75% from its high set nearly a year ago. It trades for around five times projected 2022 sales.
In a recent client note, Evercore ISI’s Mahaney wrote that small- to mid-cap internet stocks now have “moderately robust” valuations after their recent selloff at an average of about four times forward sales and 16 times projected 2022 earnings before interest, taxes, depreciation, and amortization (Ebitda). The forward Ebitda multiple is down from 26 in October but above pre-Covid levels around 12.
Within that group, Mahaney favors Bumble (BMBL), the online dating company whose shares are down to $31 from a peak of $89 after its 2021 IPO. Bumble is valued at about five times projected 2022 sales and is expected to operate at just over break-even this year.
Mahaney also like Wix.com (WIX), which creates websites. Its shares have fallen to $130 from a 2021 peak of $362 and the unprofitable company also trades for about five times estimated 2022 sales. Duolingo, which offers online lessons in foreign languages, has fallen to $89 a share from a high last year of $205 and trades for about 8.5 times projected 2022 sales.
Many of the highfliers are part of Cathie Wood’s Ark Innovation exchange-traded fund (ARKK) whose shares were off another 2% Friday, to $74.36, and have dropped nearly 50% in the past year. With the fresh losses, the ARK ETF has given up much of its outperformance versus the S&P over the past three years. Woods’ ETF offers one-stop shopping in richly priced former favorites like Teladoc, Zoom Video, Roku, Coinbase Global (COIN)
Tesla (TSLA) is the fund’s largest holding. It has held up relatively well compared with other investments, thanks to its leading position in electric vehicles as well as rising sales and profits. Tesla was off $37, to $959.27, on Friday, and down about 22% from its late 2021 peak.
Tesla bull Gary Black who runs the Future Fund Active ETF (FFND) sees the company’s earnings rising to more than $12 a share in 2022 from about $7 in 2021 and hitting $45 a share in 2025. His view is that there is nothing like Tesla in the world of megacap growth stocks.
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The 28% increase buoyed the country as it battled on several fronts but investment remains down from 2021
3 min
As the war against Hamas dragged into 2024, there were worries here that investment would dry up in Israel’s globally important technology sector, as much of the world became angry against the casualties in Gaza and recoiled at the unstable security situation.
In fact, a new survey found investment into Israeli technology startups grew 28% last year to $10.6 billion. The influx buoyed Israel’s economy and helped it maintain a war footing on several battlefronts.
The increase marks a turnaround for Israeli startups, which had experienced a decline in investments in 2023 to $8.3 billion, a drop blamed in part on an effort to overhaul the country’s judicial system and the initial shock of the Hamas-led Oct. 7, 2023 attack.
Tech investment in Israel remains depressed from years past. It is still just a third of the almost $30 billion in private investments raised in 2021, a peak after which Israel followed the U.S. into a funding market downturn.
Any increase in Israeli technology investment defied expectations though. The sector is responsible for 20% of Israel’s gross domestic product and about 10% of employment. It contributed directly to 2.2% of GDP growth in the first three quarters of the year, according to Startup Nation Central—without which Israel would have been on a negative growth trend, it said.
“If you asked me a year before if I expected those numbers, I wouldn’t have,” said Avi Hasson, head of Startup Nation Central, the Tel Aviv-based nonprofit that tracks tech investments and released the investment survey.
Israel’s tech sector is among the world’s largest technology hubs, especially for startups. It has remained one of the most stable parts of the Israeli economy during the 15-month long war, which has taxed the economy and slashed expectations for growth to a mere 0.5% in 2024.
Industry investors and analysts say the war stifled what could have been even stronger growth. The survey didn’t break out how much of 2024’s investment came from foreign sources and local funders.
“We have an extremely innovative and dynamic high tech sector which is still holding on,” said Karnit Flug, a former governor of the Bank of Israel and now a senior fellow at the Jerusalem-based Israel Democracy Institute, a think tank. “It has recovered somewhat since the start of the war, but not as much as one would hope.”
At the war’s outset, tens of thousands of Israel’s nearly 400,000 tech employees were called into reserve service and companies scrambled to realign operations as rockets from Gaza and Lebanon pounded the country. Even as operations normalized, foreign airlines overwhelmingly cut service to Israel, spooking investors and making it harder for Israelis to reach their customers abroad.
An explosion in negative global sentiment toward Israel introduced a new form of risk in doing business with Israeli companies. Global ratings firms lowered Israel’s credit rating over uncertainty caused by the war.
Israel’s government flooded money into the economy to stabilize it shortly after war broke out in October 2023. That expansionary fiscal policy, economists say, stemmed what was an initial economic contraction in the war’s first quarter and helped Israel regain its footing, but is now resulting in expected tax increases to foot the bill.
The 2024 boost was led by investments into Israeli cybersecurity companies, which captured about 40% of all private capital raised, despite representing only 7% of Israeli tech companies. Many of Israel’s tech workers have served in advanced military-technology units, where they can gain experience building products. Israeli tech products are sometimes tested on the battlefield. These factors have led to its cybersecurity companies being dominant in the global market, industry experts said.
The number of Israeli defense-tech companies active throughout 2024 doubled, although they contributed to a much smaller percentage of the overall growth in investments. This included some startups which pivoted to the area amid a surge in global demand spurred by the war in Ukraine and at home in Israel. Funding raised by Israeli defense-tech companies grew to $165 million in 2024, from $19 million the previous year.
“The fact that things are literally battlefield proven, and both the understanding of the customer as well as the ability to put it into use and to accelerate the progress of those technologies, is something that is unique to Israel,” said Hasson.
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