As Tech Selloff Continues, Focus on Secular Winners, Analyst Dan Ives Says
With inflation at a 41-year-high, a market that has entered bear territory, fears of a looming recession and a tech sector that is taking a beating, the road ahead for investors is tricky. Some analysts say, however, that in these panicked times for stocks and risks, one should focus on “tech secular winners” — stocks that will remain unaffected by short-term trends such as Microsoft and Apple.
Wedbush Securities analyst Dan Ives wrote in a June 20 note that, in what has been an absolutely brutal year for the market and especially tech stocks, the path of least resistance for investors is to stay away from any risk assets till the dark economic storm clouds clear.
Indeed, the tech-heavy Nasdaq is down 31.8% year-to-date.
“We clearly could be looking at a very volatile few months still ahead as the Street tries to get a gauge if inflation has started to finally peak and what type of recession now likely lies ahead into 2023,” he wrote in the note sent to GoBankingRates, adding that valuations across the board have been decimated both on the public and private markets with “more pain ahead as the new reality of a softer macro is now upon us with the Fed in an Olympic Sprint to tighten and global markets readying for this Category 5 economic storm.”
In turn, he believes that it’s a tale of two cities in the tech world, with consumer-facing tech and “work from home poster child” seeing clear softening and demand starting to dry up in the field, especially around digital advertising.
On the other hand, enterprise cloud, cyber security and high-priority pockets of IT budgets are holding up particularly well.
He added that Wedbush believes in a worst-case scenario, numbers for 2023 to come down by less than 10% from today’s expectations, while in a base case scenario they are down 5% from today’s numbers.
The bearish sentiment was echoed in a Goldman Sachs recent survey, which found that two-thirds of respondents expected the tech sector to drop by at least another 10%.
“Importantly, we believe the Street is already baking in a mild recession into current tech stocks and the risk-reward set up (outside of a prolonged, harsh recession) is favorable for our top enterprise plays,” Ives wrote.
“We continue to view this bifurcated tech tape will be driven higher by software, semis, cyber security, and product-driven names (Apple) as part of this digital transformation, while the e-commerce world/digital ad plays will continue to see multiples compress with fears around soft 2Q results around the corner,” he added.
Wedbush’s top picks in the tech sector remain Microsoft, Salesforce and Apple. In terms of its favorite sub-sector, the cyber security space, favorite picks include Palo Alto, Zscaler, Tenable, Fortinet and CyberArk.
“Our unwavering view is that the shift to the cloud is only ~40% complete with a massive digital growth wave ahead that will benefit Microsoft, Amazon (AWS), Google (GCP), and Oracle,” he said. “Through the market storm we see the forest through the trees.”
He added that while the tech sell-off has been “unrelenting and it’s easy for investors to throw in the towel and further shed the tech sector,” secular drivers around cloud, cyber security and the new digital age are not going away despite this shaky period for the economy.
“Our view, in a nutshell, is that tech stocks have overcorrected and especially cloud/cyber names are way oversold at current levels for investors willing to own these names on the other side of this storm into 2023,” he said.
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