After a massive sell-off that pushed the tech-heavy Nasdaq down as much as 17%, the worst may still be yet to come for a crop of buzzy names like Tesla and eBay, Bank of America cautioned Tuesday, but the investment bank’s analysts also see opportunity in a set of tech stocks with strong profit potential and now-cheap valuations.
The threat of higher interest rates, disappointing quarterly reports and waning Covid-19 cases have pushed technology stocks into “growth purgatory,” Bank of America’s Savita Subramanian wrote in a Tuesday note to clients, pointing out a 0.5% drop in quarterly earnings has helped push the Nasdaq down 15% this year, compared to nearly 10% for the S&P 500.
Despite the sell-off, the analysts cautioned that many plunging stocks may still be “dead money,” recalling that it took about 10 years for the technology sector to recover and regain its lead after the dot-com crash pushed the Nasdaq down as much as 75% between 2000 and 2002.
As a result, the analysts favor technology stocks with “healthy” free cash flow relative, pointing out such names have consistently performed among the top 25% of stocks since 1985.
A slew of semiconductor stocks—including Nvidia, Applied Materials, Micron Technology and Qualcomm—head up the analysts’ recommendations after plummeting as much as 30% since November, with stronger-than-expected demand for electronics likely to bolster the industry’s already high profitability for years to come.
Other names matching the criteria after recent plunges include Microsoft and Apple, both of which smashed Wall Street’s fourth-quarter expectations despite dismal results from big-tech peers Facebook and Netflix.
Who’s not on Bank of America’s buy list? Even after sinking 33% this year, Tesla stock remains too expensive to earn a buy recommendation (despite surging profitability), while online marketplace eBay, down 17% this year, lacks the profitability potential after seeing earnings slump 9% quarter over quarter.
“When do you buy all of tech? When everyone stops asking when to buy tech—before that it might be a falling knife or dead money,” Bank of America said Tuesday. “Be selective: Following the tech bubble, it took tech roughly a decade to consolidate and repair its balance sheets, during which many tech companies went away.”
Technology stocks led the market’s rally after a pandemic-induced crash in early 2020, helping the Nasdaq soar as much as 130% through November. Starting last spring, however, accelerating economic growth and the threat of rising interest rates spurred a stock-market rotation away from growth stocks, like those in tech, to cyclical and value-leaning slices of the market. That rotation came to a head last month, when stocks posted their worst start to a year since the Great Recession. The Nasdaq is down about 17% from an all-time high set in November, while the S&P is down only 8%.
Though plummeting valuations forced many companies to shutter after the dot-com bubble popped, one in four stocks that debuted on U.S. exchanges in 1999 are blue chips today, Bank of America notes, adding that surviving IPOs have seen their valuations climb by about 400%.
Not everyone’s convinced tech stocks are in a bubble. Famed stock picker Cathie Wood, the CEO of New York City investment firm Ark Invest, doubled down on her staunch bullishness for disruptive technology last week. Wood said her flagship fund’s “significant decline” has left its portfolio of technology stocks “way undervalued relative to [its] potential,” positing that rapid inflation, which has fueled concerns of more-hawkish Fed policy and driven investors away from many tech stocks, should ultimately end. “Give us five years,” Wood said, adding that her “biggest concern” is that investors cash out amid the slump and “turn what we believe are temporary losses into permanent losses.”
‘Give Us Five Years’: Cathie Wood Defends Struggling Tech Stocks As Flagship Fund Craters (Forbes)
Stocks Fall Further, Oil Prices Surge After Putin Orders Troops Into Eastern Ukraine (Forbes)