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.
The technology sector may not be on sale, but it certainly has gotten cheaper lately.
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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New research suggests spending 40 percent of household income on loan repayments is the new normal
Requiring more than 30 percent of household income to service a home loan has long been considered the benchmark for ‘housing stress’. Yet research shows it is becoming the new normal. The 2024 ANZ CoreLogic Housing Affordability Report reveals home loans on only 17 percent of homes are ‘serviceable’ if serviceability is limited to 30 percent of the median national household income.
Based on 40 percent of household income, just 37 percent of properties would be serviceable on a mortgage covering 80 percent of the purchase price. ANZ CoreLogic suggest 40 may be the new 30 when it comes to home loan serviceability. “Looking ahead, there is little prospect for the mortgage serviceability indicator to move back into the 30 percent range any time soon,” says the report.
“This is because the cash rate is not expected to be cut until late 2024, and home values have continued to rise, even amid relatively high interest rate settings.” ANZ CoreLogic estimate that home loan rates would have to fall to about 4.7 percent to bring serviceability under 40 percent.
CoreLogic has broken down the actual household income required to service a home loan on a 6.27 percent interest rate for an 80 percent loan based on current median house and unit values in each capital city. As expected, affordability is worst in the most expensive property market, Sydney.
Sydney
Sydney’s median house price is $1,414,229 and the median unit price is $839,344.
Based on 40 percent serviceability, households need a total income of $211,456 to afford a home loan for a house and $125,499 for a unit. The city’s actual median household income is $120,554.
Melbourne
Melbourne’s median house price is $935,049 and the median apartment price is $612,906.
Based on 40 percent serviceability, households need a total income of $139,809 to afford a home loan for a house and $91,642 for a unit. The city’s actual median household income is $110,324.
Brisbane
Brisbane’s median house price is $909,988 and the median unit price is $587,793.
Based on 40 percent serviceability, households need a total income of $136,062 to afford a home loan for a house and $87,887 for a unit. The city’s actual median household income is $107,243.
Adelaide
Adelaide’s median house price is $785,971 and the median apartment price is $504,799.
Based on 40 percent serviceability, households need a total income of $117,519 to afford a home loan for a house and $75,478 for a unit. The city’s actual median household income is $89,806.
Perth
Perth’s median house price is $735,276 and the median unit price is $495,360.
Based on 40 percent serviceability, households need a total income of $109,939 to afford a home loan for a house and $74,066 for a unit. The city’s actual median household income is $108,057.
Hobart
Hobart’s median house price is $692,951 and the median apartment price is $522,258.
Based on 40 percent serviceability, households need a total income of $103,610 to afford a home loan for a house and $78,088 for a unit. The city’s actual median household income is $89,515.
Darwin
Darwin’s median house price is $573,498 and the median unit price is $367,716.
Based on 40 percent serviceability, households need a total income of $85,750 to afford a home loan for a house and $54,981 for a unit. The city’s actual median household income is $126,193.
Canberra
Canberra’s median house price is $964,136 and the median apartment price is $585,057.
Based on 40 percent serviceability, households need a total income of $144,158 to afford a home loan for a house and $87,478 for a unit. The city’s actual median household income is $137,760.
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