When To Back Up The Truck In A Falling Tech Market

Nikada/iStock Unreleased via Getty Images

Technology and high-tech stocks are suffering. The Vanguard Information Technology ETF (VGT) has dropped 24%, and the ARK Innovation ETF (ARKK), once synonymous for a strong energy market, has dropped almost 75%. However, despite our expectations for continued weakness in the markets, we see several opportunities we’re tracking.

Continued Weakness

The first question you must be asking is why do we expect continued weakness in the markets. It’s worth noting that we already own positions in all of these stocks, however, we’re looking to use the below price targets as “back up the truck” targets where we maximize our investments. However, in the intermediate term we expect continued weakness for three reasons.

1. Interest Rates

It’s not a secret that inflation has been running high. The strong economic recovery after COVID-19 has pushed up prices. The central bank has been doing its job of raising interest rates in order to pressure prices and reduce inflation rates. However, there’s a lot of side effects to pay attention to rising interest rates.

One of the most substantial is that the market as a whole tends to trade at a lower valuations. Investopedia has the basics, however, this tends to especially affect growth stocks trading at a high valuation. Technology has been through a substantial bull market and has some of the highest trading ratios, which means rising interest rates will put downward pressure on the company.

2. Supply Chain Crisis

The supply chain has been in crisis since the start of COVID-19, and that can be expected to continue. No one predicted a massive spike in toilet paper demand.

This graph about Shanghai's port puts the supply chain crunch in perspective | Fortune

Shanghai – Ningo Zhoushan represents the largest port complex in the world by a substantial margin. Together the ports move more than 60 million TEUs/year, or for perspective, more than all of the ports in the United States combined. With substantial Shanghai lockdowns, the number of ships waiting has skyrocketed.

China is continuing to embrace a zero-COVID-19 policy, and in Shanghai, residents have been protesting. It’s delaying the global shipping industry at a time that the rest of the world is re-opening with China as the world’s manufacturing hub. A supply train in crisis will continue to put substantial pressure on the global economy.

3. Brand New Investors

One of the side effects of the pandemic was the rapid increase in brand new investors.

The Evolving Landscape of U.S. Retail Investing

The new investor is much younger. Pre-2020 only 6% of investors were under 30, however, 22% of new 2021 investors were under 30. That’s a substantial number of new and young investors. Someone turning 30 in 2021 was 17 years old in 2008, just finishing up their high school and graduating as the Class of 2009.

That also means they’ve spent the entirety of their adult lives in a bull market. With their first downturn coming to fruition, they haven’t seen what a true market panic would be, and we expect that these investors would be much less likely to hold onto their investors. Young investors are more likely to have regrets and trade more often.

Alphabet

Back Up The Truck Price Target: $1,450/share

Alphabet Inc. (GOOGL) (GOOG) is currently trading at a market capitalization of just under $1.5 trillion, with a price per share of $2,250. The company would have 35% to drop to reach our price target, and the company is currently 25% below its highs.

Alphabet Investor Presentation

Alphabet’s 1Q 2022 earnings were unique in that the company was one of the few tech stocks to financially continue to outperform. The company saw 23% YoY revenue growth (26% constant currency) and managed to see no compression within its margins. As a result, the company generated earnings of almost $25/share (other income fluctuated).

The company has had its struggles but all aspects of the company’s business continued to outperform. More so, the company has two unique things going for it in our view. First, the company has a full network of main properties (Google, Gmail, YouTube, Android etc.). Versus other large technology companies (i.e., Amazon) we view Google as much more diversified.

Secondly, the company is continuing to diversify and invest in new technologies but it’s doing it in a very managed way. The company’s very exciting combined Google Cloud + Other Bets divisions posted a combined $6.2 billion in revenue, up more than 50% YoY, and $2 billion in losses, roughly flat YoY.

Outside of Google Cloud, the company’s moonshot projects contain businesses like Waymo, which is already earning a respectable valuation on its own. In the most recent earnings, the company announced a $70 billion share buyback and with market weakness, can now buy back 5+% of its outstanding shares. We’d like to see the company take full advantage of that.

Our $1,450 price target, technically, represents lows the company tested several times in the late-2020s, and is just below several highs the company set. Technically, we feel it represents a strong level for the company’s stock, and a strong purchase price level from future market weakness.

Apple

Back Up The Truck Price Target: $120/share

Apple Inc. (AAPL) is still the largest company in the world despite a valuation of just under $2.5 trillion, down from the company’s $3 trillion valuation. Our price target for the company is $120 / share, or just over 21% below the company’s current share price, and the company has dropped 15%.

Apple Investor Presentation

Apple, like Google, is a financial powerhouse. The company’s annualized net income is >$100 billion and the company is the largest repurchaser of stock in the world, announcing a 5% dividend increase and $90 billion increase in buyback authorization with the company’s most recent earnings announcement.

The company is unique, in our view, among large technology companies for lumping its “new projects” into categories with successful businesses and counting them as a cost of doing business. However, the company also has numerous upstart projects such as Apple TV, Apple Music, and the company’s other rumored projects.

We’ve complained before that the company was overvalued, when it was trading at a 3% FCF yield. However, the recent weakness has already increased that to 4%, and our $120 / share target represents a 5% FCF yield along with price levels the company tested throughout 2020. That yield combined with the company’s growth is a major opportunity in our book.

AMD

Back Up The Truck Price Target: $55/share

Advanced Micro Devices, Inc. (AMD) is one of the more volatile technology stocks and one that we’ve recommended both for and against numerous times before. We’re still a fan, and the company had incredibly strong first quarter earnings. However, the company is also almost 45% below its 52-week highs, a level where we warned the company was overvalued.

Our $55/share target is more than 35% below current prices.

AMD Investor Presentation

There’s no denying AMD’s impressive earnings through 1Q 2022. The company say amazing numbers both on a YoY and QoQ business although the end of the year tends to be the strongest quarter. The company’s revenue went up 71% YoY and 22% QoQ and the company’s non-GAAP earnings of $1.13 per share more than doubled year over year.

More importantly in our view, the company managed to increase its margins. Growing margins and revenue at the same time is the double whammy the company needs to rapidly increase its profits. Additionally we think that economic weakness could be a boon to the company, decreasing incentives for customers to spend billions in capital to build their own alternative chips.

The $55 / share price is, like our other prices, a level that AMD spent substantial time at forming a strong base. It represents strong value for the growing company and we see it as a strong “back up the truck price.”

Thesis Risk

The risk to our thesis is that market downturns are always unpredictable. Companies go bankrupt. Even if that’s not a company you’re invested in, it might be a customer, manufacturer, or insurer of the company you invest in. People get scared, investors sell, you might lose your job and need capital. Preparing to set aside capital for a “back up the truck price” might also mean you lose out on other opportunities if the downturn doesn’t manifest.

Still with our view that the worst is yet to come, we see the potential for valuable investments on the horizon.

Conclusion

While we have numerous technology investments in our portfolio, that doesn’t mean that we’re deploying all of our spare capital right away. We think, for several reasons, that the markets continue to have significant room to decline. That’s on top of the more than 25% decline that the technology markets have seen so far.

Google, Apple, and AMD are three valuable investments. We present our price targets and thesis above. These are back-up-the-truck prices that we are paying close attention to and planning to invest heavily in. We do foresee these companies prices hitting these targets. Let us know your thoughts in the comments below.

Leave a Reply

Your email address will not be published.