Tech investors have been holding on for dear life lately: The sector sold off over 13% last month, and is trading down roughly 20% so far this year as gauged by the Nasdaq Composite. But for some money managers, the recent trials of the sector serve as a discount shopping opportunity for certain battered areas within tech.
Though risks remain, “valuations are as attractive as they’ve been in a very long time in tech,” Sung Cho, a portfolio manager of the Technology Opportunities Fund and Future Tech Leaders Equity ETF at Goldman Sachs Asset Management, tells Fortune. That’s in part because the Federal Reserve’s rate hikes, the ongoing war in Ukraine and its broader economic impacts, and new COVID-19 lockdowns in China have all helped fuel the selloff, he notes.
But even in a climate in which global growth might struggle (or even, as some are pondering, in a recession), spending on tech should remain strong, Cho suggests: “We spend a lot of time with CEOs across multiple sectors, and none of them are talking about cutting their tech budgets,” says Cho. “Businesses have more pressure to be able to digitize, workloads are moving to [the] cloud at an accelerating pace, security is becoming paramount. So tech remains a very big priority.”
And while much of Wall Street has been bearish on tech, “Given where valuations are now and how compelling they are, we think it’s an attractive entry point for any investor seeking to buy tech over the long term,” Cho argues.
3 “controversial” tech bets
Cho isn’t shying away from stocks with “the most amount of controversy and angst amongst investors. In fact, that’s where he tells Fortune he’s seeing the most opportunity right now.
Chief among them is China tech, where Cho says investors are still wary of regulation and ongoing COVID-related lockdowns further complicating supply chains. But he points to reports that the Chinese government is prepping a big round of stimulus, where tech will be “a key focus area,” he notes, also highlighting that the government is intent on making core industries of the digital economy comprise 10% of its GDP by 2025. Within China, Cho favors semiconductors and software, two areas where he argues “the baby is being thrown out with the bathwater” in terms of regulatory concerns. Those include stocks like Kingdee International Software (OTC: KGDEY), cybersecurity firm Venustech (SHE: 002439), and semiconductor company Silergy (TPE: 6415). Cho notes those areas have been trading at a discount compared to other global names because of China-specific concerns, but thinks the space is “going to be one of the fastest growing areas across the tech landscape over the next two years,” adding that the selloff is “creating an opportunity” to buy in.
Speaking of semiconductors, Cho believes the sector, despite its nature, shouldn’t prove quite as cyclical this time around. He suggests investors are expecting a “fairly large reduction in earnings estimates,” but argues instead that the “earnings correction is actually going to be shallower even if the demand environment continues to be muted, because one thing that I think is different about this cycle versus prior cycles is that inventories didn’t really have a chance to build … because of all the supply chain pressures that we’ve seen,” he notes (case in point: the auto industry’s continued backlogs). There, he’s bullish on ON Semiconductor (NASDAQ: ON), a U.S.-based chip maker that just posted record revenues in the first quarter. Considering semiconductor companies broadly have traded down over 26% this year, per the S&P Semiconductors Select Industry Index, while ON Semiconductor is off nearly 7% in the last month, he thinks they’re looking “attractive” given how investors have “overreacted.”
Cho also likes high-growth SaaS (software-as-a-service) companies, because, despite being in the “center of the storm” when it comes to the selloff and concerns over rising rates and a possible global economic slowdown, the majority of software names have thus far reported “strong” earnings “with very minimal impacts out of what’s going on in Europe” given what he suggests is the prioritization of software spending “even in challenging macro times.” His pick there is Snowflake (NYSE: SNOW), a firm that’s had a tough year in the market as its stock has plummeted nearly 50% since the start of January, but which could sustain “high” rates of growth as its services fall under that priority for enterprises.
Steer clear
But not all sectors that have sold off are attractive. And Cho says there are two areas in particular he’s avoiding.
He suggests investors side step companies with ad-based revenue models at the moment (think Google and Snapchat). “If people start worrying about the macro [environment], the first thing that they start to pull are some of the advertising budgets. And so you are seeing some cyclical ad-driven … related pressure,” he suggests (Google parent Alphabet and Snapchat stocks are off over 18% and 25% in the past month, respectively).
Another area he’s steering clear for now? The fintech space broadly, including neobanks and exchanges (think a stock like Robinhood, which is off roughly 24% in the past month). He suggests those kinds of stocks have been “very capital markets reliant,” and as interest rates and the “cost of capital rises, it really impacts not only their valuation, but actually their ability to run their business,” Cho suggests.
But with all the red on the tech screens of late, one thing’s for sure: it takes a strong-stomached investor to find the right deals.
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