The tech sell off & diamonds in the rubble
The tech sell off & diamonds in the rubble
Investment ideas in tech post the panic
So the market got caught up in a good old fashioned panic. I actually do happen to like these kind of events, and usually sharp sell-offs allow investors to accumulate great companies at discount prices. Semis got hit hardest, as well as high growth software. Basically we’re looking at the third strongest pullback in semis over the last five years, and by far the sharpest sell off of the three:
There are obviously a lot of similarities with the brief stock market crash of ‘87 where the market plunged more than 20% in a day, which turned out to be a good buying opportunity. I’ve flagged a number of times in this newsletter and also on X (Twitter) how a number of areas and stocks in leading edge semis were looking stretched, which played a factor for this sell off to happen, as de-rating potential in these names had been building up. However, the good news is that valuations in a lot of names are now looking reasonable again, and some are even outrightly cheap.
The bear case would be that if the economic data worsens considerably, the market could go into a longer-style bear market, with rallies here and there in between. However, this panic looks to me likely to be temporary pullback. First of all, the Fed has a lot of ammunition with the fed funds rate currently being at 5.33%. And naturally there is also the option of QE later on if interest rates cuts don’t turn the tide. I’d be a lot more concerned if we still had high inflation and the Fed would have to keep rates high, this is basically what happened in the early eighties when stock market valuations went to an all time low.
However, this time around, the Fed’s favorite metric has now come down to a reasonable 2.5%, giving them room to manoeuvre:
And the Fed has plenty of room to do so given where the Fed funds rate (blue line) is:
So overall, there shouldn’t be any reason to panic here, and I expect that the current volatility — and possible further volatility in the weeks ahead — will turn out to be a good time to add to quality tech names with long term attractive outlooks. At the very least it’s a much better time to invest than two weeks ago.
In this post, we’ll tour the best names in tech and I’ll offer brief comments why I like each name. I believe there are a number of diamonds among the rubble where valuations are now looking very attractive. The first few ideas will be free for all and then we’ll tour a lot of other names for premium subscribers.
#1: Hyperscalers
If you’re looking for the safest growth businesses in tech, I’d go for the public cloud hyperscalers. Cloud engineers are highly trained on these platforms and customers don’t want to run a too fragmented infrastructure, so they’ll typically select two public cloud platforms from three choices i.e. Microsoft, Amazon and Google to have some pricing leverage. That said, the pricing power of these platforms is strong as it is extremely hard for a customer to move away, and gradually over time customers will start using ever more of the apps provided by the public clouds themselves, the so called ‘Platform as a Service’, locking in the customer basically for good.
So now the multiple for both Microsoft and Amazon has come back to a more reasonable 30x, it’s still not cheap, but at these levels and if the shares go further south, I’d be happy to add to quality names like these as you should get double digit top line growth combined with operating leverage over time.
A very similar story is Meta, the company owns the most popular social media apps with Facebook, Instagram and WhatsApp, and is now also one of the leaders in LLMs with their impressive Llama-3 model. Zuck also talked on the conference call how he wants to integrate search via Llama-3 in their apps, so potentially the company could also become a player in the lucrative search market where currently Google is the sole ruler. Similarly to the other hyperscalers, this is a name which should give investors double-digit top line growth with operating leverage over time.
So Google could potentially be under fire in their bread-and-butter search market, although AI also provides opportunities for them. First, due to better search results with AI, more search is happening which gives the company more opportunities to monetize these. Secondly, the company is also the leader in robotaxis and these services are gradually rolling out in more cities. Over time, it’s likely that robotaxis will become a massive market and Google looks well positioned here.
