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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Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
Government spending, including Biden’s Inflation Reduction Act, has helped drive a gap between clean-energy spending and fossil-fuel investments
3 min
Investments in solar power are on course to overtake spending on oil production for the first time, the foremost example of a widening gap between renewable-energy funding and stagnating fossil-fuel industries, according to the head of the International Energy Agency.
More than $1 billion a day is expected to be invested in solar power this year, which is higher than total spending expected for new upstream oil projects, the IEA said in its annual World Energy Investment report.
Spending on so-called clean-energy projects—which includes renewable energy, electric vehicles, low-carbon hydrogen and battery storage, among other things—is rising at a “striking” rate and vastly outpacing spending on traditional fossil fuels, Fatih Birol, the IEA’s executive director said in an interview. The figures should raise hopes that worldwide efforts to keep global warming within manageable levels are heading in the right direction, he said.
Birol pointed to a “powerful alignment of major factors,” driving clean-energy spending higher, while spending on oil and other fossil fuels remains subdued. This includes mushrooming government spending aimed at driving adherence to global climate targets such as President Biden’s Inflation Reduction Act.
“A new clean global energy economy is emerging,” Birol told The Wall Street Journal. “There has been a substantial increase in a short period of time—I would consider this to be a dramatic shift.”
A total of $2.8 trillion will be invested in global energy supplies this year, of which $1.7 trillion, or more than 60% will go toward clean-energy projects. The figure marks a sharp increase from previous years and highlights the growing divergence between clean-energy spending and traditional fossil-fuel industries such as oil, gas and coal. For every $1 spent on fossil-fuel energy this year, $1.70 will be invested into clean-energy technologies compared with five years ago when the spending between the two was broadly equal, the IEA said.
While investments in clean energy have been strong, they haven’t been evenly split. Ninety percent of the growth in clean-energy spending occurs in the developed world and China, the IEA said. Developing nations have been slower to embrace renewable-energy sources, put off by the high upfront price tag of emerging technologies and a shortage of affordable financing. They are often financially unable to dole out large sums on subsidies and state backing, as the U.S., European Union and China have done.
The Covid-19 pandemic appears to have marked a turning point for global energy spending, the IEA’s data shows. The powerful economic rebound that followed the end of lockdown measures across most of the globe helped prompt the divergence between spending on clean energy and fossil fuels.
The energy crisis that followed Russia’s invasion of Ukraine last year has further driven the trend. Soaring oil and gas prices after the war began made emerging green-energy technologies comparatively more affordable. While clean-energy technologies have recently been hit by some inflation, their costs remain sharply below their historic levels. The war also heightened attention on energy security, with many Western nations, particularly in Europe, seeking to remove Russian fossil fuels from their economies altogether, often replacing them with renewables.
While clean-energy spending has boomed, spending on fossil fuels has been tepid. Despite earning record profits from soaring oil and gas prices, energy companies have shown a reluctance to invest in new fossil-fuel projects when demand for them appears to be approaching its zenith.
Energy forecasters are split on when demand for fossil fuels will peak, but most have set out a timeline within the first half of the century. The IEA has said peak fossil-fuel demand could come as soon as this decade. The Organization of the Petroleum Exporting Countries, a cartel of the world’s largest oil-producing nations, has said demand for crude oil could peak in developed nations in the mid-2020s, but that demand in the developing world will continue to grow until at least 2045.
Investments in clean energy and fossil fuels were largely neck-and-neck in the years leading up to the pandemic, but have diverged sharply since. While spending on fossil fuels has edged higher over the last three years, it remains lower than pre pandemic levels, the IEA said.
Only large state-owned national oil companies in the Middle East are expected to spend more on oil production this year than in 2022. Almost half of the extra spending will be absorbed by cost inflation, the IEA said. Last year marked the first one where oil-and-gas companies spent more on debt repayments, dividends and share buybacks than they did on capital expenditure.
The lack of spending on fossil fuels raises a question mark around rising prices. Oil markets are already tight and are expected to tighten further as demand grows following the pandemic, with seemingly few sources of new supply to compensate. Higher oil prices could further encourage the shift toward clean-energy sources.
“If there is not enough investment globally to reduce the oil demand growth and there is no investment at the same time [in] upstream oil we may see further volatility in global oil prices,” Birol said.
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
