In the days before coronavirus, when markets were hitting new highs, technology stocks were the tip of the spear. Just a few weeks ago, there were four U.S. companies with market valuations above $1 trillion, all of them tech stocks.
Those companies— Microsoft (ticker: MSFT), Apple (AAPL), Amazon.com (AMZN), and Google parent Alphabet (GOOGL)—with their fortress-solid balance sheets, are poised to come out of the downturn just as strong as they went in.
But for intrepid tech investors, there are less obvious opportunities to be found amid the current carnage and chaos.
To help find the best ideas, Barron’s reached out to a few of our favorite tech-focused stockpickers. Some clear themes run through their recommendations: The work-from-home revolution underlines the power of cloud computing; we all still need to be entertained, even if we’re stuck at home; and we’re still going to need broadband, now more than ever.
Here’s what the experts have to say:
Readerman is proprietor of Endurance Capital Partners, a San Francisco–based tech hedge fund. Readerman has zeroed in on cloud plays. “What’s certainly being reinforced right now,” he says, “is that cloud-based information-technology architecture is providing agility and resiliency for companies to operate dispersed workforces.”
Readerman says the jury is out on whether there’s a lasting impact on how we work, but he adds that contingency planning now requires the ability to work remotely for extended periods. Among his cloud software picks are DocuSign (DOCU), a provider of digital-signature software, and Zoom Video Communications (ZM), the videoconferencing company that has been one of the year’s best stocks. “If there was ever doubt about the migration of the enterprise to cloud platforms, Covid-19 has proved its capabilities,” he says.
Readerman concedes that Zoom’s valuation looks extreme—the stock trades at 34 times Wall Street’s sales estimate for the fiscal year ending January 2022—but he says there’s an opportunity for Zoom to monetize its surge in new users. He thinks that Zoom can expand beyond videoconferencing to offer a wider range of tools. “Zoom reminds me of AOL when it was everywhere, with ease of use and the freemium model,” he says.
Readerman is bullish, too, on data center operators like Equinix (EQIX) and Digital Realty Trust (DLR). On the more speculative side, he likes their smaller rivals, CyrusOne (CONE) and CoreSite Realty (COR), which could be consolidation targets. He says that Equinix is seeing a surge in traffic to its servers, another sign of the growth of the cloud-computing trend. “Grocery stores are sold out of toilet paper, and we all need more broadband,” he says. Companies like Equinix, he adds, are “the critical on/off ramp for internet-based connectivity and commerce.”
Greenfield, the co-founder of research boutique LightShed Partners, has covered entertainment and media companies for 25 years. His coverage universe was dealing with disruption—the technological kind—long before coronavirus, but the pandemic is creating a set of more serious challenges, with movie theaters and theme parks closed, sports shuttered, and ad budgets crunched. Greenfield notes that 12 of the top 50 TV advertisers are ailing auto makers; another 11 are quick-serve restaurant chains.
The lack of sports content is particularly problematic on the advertising front. The National Collegiate Athletic Association basketball tournament was canceled, and the National Basketball Association season, Major League Baseball, and the Olympics have all been delayed. There is no clarity on when the event calendar will pick up—and when people will be comfortable in public settings. “How long does it last?” Greenfield asks. “Does the stimulus ward off a recession or depression? It’s hard to tell. No one knows how to forecast this.”
But people still crave entertainment, and that’s keeping Greenfield bullish on Netflix (NFLX). Unlike most content companies, Netflix sells no ads. And while movie and TV production is shut, Netflix has several months of new content ready to go. “They’re in a really strong position relative to their peers,” he says, pointing to Walt Disney (DIS), which has been battered on multiple fronts—its ESPN has no sports to show, its theme parks are closed, and it has no open theaters through which to distribute films. The weak ad market, meanwhile, is problematic for Disney’s broadcast and cable properties.
Says Greenfield: “More people are using Netflix than ever before.” He notes that the number of subscribers is accelerating, which isn’t surprising given all of the home-bound people with more hours to fill and no sports to watch. He says Netflix will benefit from people switching to more expensive multiple-user plans and from reduced churn, or cancellations. In coming quarters, he says, Netflix will have “higher subscriptions, higher average revenue per user, and better free cash flow than people think.”
Greenfield is also bullish on Twitter (TWTR), which this past week warned that revenue for its March quarter would be down year over year, as ad budgets fall. But, he notes, Twitter is seeing record usage. While profits and revenue will take a near-term hit, he points out that Twitter can withstand the crisis, with $6.6 billion in cash.
And the company is poised to benefit from a crowded events calendar once the virus threat ebbs. “There aren’t enough weekends on the calendar for all the stuff coming down from September through summer 2021,” Greenfield says, with spring sporting events shifted to the fall, a packed film-release schedule, and the November election. “It’s absurd.” And he thinks it will all drive traffic—and ad dollars—to Twitter.
Meeks wears multiple hats, as a portfolio manager for Independent Solutions Wealth Management, an asset management firm in Williamsville, N.Y., and a manager of The Wireless Fund, a small tech mutual fund. Meeks say that he has been using the recent rally to raise cash, while dabbling in marquee names and “banking proceeds for a better day.”
Meeks says that he’s waiting until “earnings estimates are slashed to the bone” before making substantial new commitments. “I need to see them all confess all their sins, and to take down numbers dramatically.”
In the meantime, Meeks has been nibbling on megacaps, specifically Amazon and Alibaba Group Holding (BABA), both of which he thinks will benefit from the expanded role that e-commerce will play in the post-coronavirus world. Eventually, he says, when earnings estimates reset, he wants to own his “dream team of semiconductor stocks,” including Advanced Micro Devices (AMD), Lam Research (LRCX), Taiwan Semiconductor Manufacturing (TSM), Micron Technology (MU), and Applied Materials (AMAT), where he expects to go from basically zero to a big overweight.
Meanwhile, Meeks is bullish on Virtu Financial (VIRT), a New York–based tech-driven financial trading platform. Meeks sees the company as a play on volatility. He notes that Virtu trades for about 10 times earnings and pays a “fairly certain” dividend, currently yielding 4.3%. “When stocks go up endlessly again, and investors are complacent, they become an average company again,” he says. But, for now, Virtu will benefit as long as we continue to see “whipsaw moves in both directions.”
Niles is founder and portfolio manager for the Satori Fund, a tech-focused hedge fund. On Feb. 17, just after Apple pulled its March quarter guidance, Niles tweeted that he had 50% of his portfolio short Apple, seven of the company’s suppliers, and QQQ, an exchange-traded fund that tracks the Nasdaq 100. It was a prescient call.
Niles remains generally bearish on the market, but there are stocks he likes and owns, particularly around videogames. While Niles thinks the market has exaggerated the impact of a fifth-generation, or 5G, iPhone launch later this year, he sees opportunity in a less-watched product cycle: new videogame consoles from Microsoft and Sony (SNE), expected this fall. “They’re going to launch the first new hardware platforms since 2013, and everyone is stuck at home,” he says. “I like them all,” he says of the videogame stocks, including Zynga (ZNGA), Take-Two Interactive Software (TTWO), and Electronic Arts (EA), along with China’s NetEase (NTES) and Tencent Holdings (700.Hong Kong).
Other Niles bets are Amazon, a beneficiary from the shift to e-commerce, and work-at-home play RingCentral (RNG), a cloud-based communications provider. Meanwhile, he’s still ready to short Apple again as the stock rallies. For one thing, he says, “I don’t know who is going to feel rich enough to buy an iPhone.” And he wonders why anyone would pay 19 times current earnings for Apple, when other hardware plays like Dell Technologies (DELL) and HP Inc. (HPQ) trade for just seven times.
Moffett, founder of the research boutique MoffettNathanson, is the market’s most influential telecom and cable seer. He predicts deep issues for some of the largest companies he covers, notably AT&T (T) and Comcast (CMCSA), given their exposure to ad-supported content through their respective WarnerMedia and NBCUniversal segments. AT&T and Comcast are getting a boost from their broadband units, but Moffett sees better ways to play that trend.
He’s bullish on Charter Communications (CHTR) and Altice USA (ATUS), both pure plays on the cable business and, therefore, free of ad-supported content worries. Charter is down 13% over the past month. “The fact that Charter has sold off as much as the broader market makes no sense at all,” Moffett says. “The cable companies are simply digital infrastructure providers. They are agnostic about how you can get your video content. And the broadband business is going to be just fine.”
He says that Altice, while a little riskier than Charter, is even cheaper. Both companies are seeing demand for faster—and more expensive—broadband plans, with parents and children spending so many hours at home. Moffett thinks that Altice could rally 40% to 50%, while Charter could rise 30% to 40%.
Moffett is also bullish on T-Mobile US (TMUS), which is about to be a strong No. 3 player in the U.S. wireless market after it closes a pending deal to buy Sprint (S). “They’ll be very well positioned, with line of sight to cost savings and margin expansion, and network advantages that should translate into market-share gains for years and years to come,” he says. And while Moffett still sees some risk to the deal’s completion, he thinks that T-Mobile is attractive with or without Sprint.
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