As negative sentiments continue with fears of recession combined with possible stagflation, we look for buying opportunities in this bear markets with stocks that have a good chance of outperforming in the longer run.
With this, we have identified 5 US listed tech stocks and provide a few possible reasons why these are good buys.
1) Amazon (Nasdaq:AMZN): -29% from all time high(ATH)
Amazon was the biggest laggard of the MAMAA stocks in 2021 while Meta Platforms has taken over in 2022 for now with its plunge after its 4Q21 results was released. It has significant potential upside from its various segments.
With its core Amazon store business supported by significant investments in delivery and logistics, Amazon has continuously stayed at the forefront of the highly competitive e-commerce business.
Demand for cloud computing is expected to record significant compounded annual growth rate at least till 2030. With Amazon Web Services being the top provider for this service globally, this segment will be at the forefront of growth for the company.
Other segments such as its devices and services segment with products such as Echo and Kindle and well known services such as Alexa will also position the company to capture market share in the Metaverse.
Lastly, it also has an entertainment segment with products such as Prime Video, Audible and Twitch for customers to enjoy.
Amazon recently announced a 20-1 stock split and a $10b share buyback which led to a 10% gain in share prices. While some investors may look at this share buyback as an indication that Amazon does not have other investments to make, Amazon is cash rich and may likely be able to carry out both the buy back and make its required investments.
2) MercadoLibre (Nasdaq: MELI): -53% from ATH
MercadoLibre is widely considered as the Amazon of Latin America as it is the largest e-commerce provider in the region. However, other than the e-commerce segment, MercadoLibre has very different business segments from Amazon as it is also one of the leading software and fintech platform with MercadoPago, a fast growing digital payment solutions arm.
It is fast growing with a revenue growth of 73.9% YoY while its GMV grew 32.2%. Unlike other tech companies such as Grab who recorded higher GMV growth as a % as opposed to higher revenue growth as a %, MercadoLibre has been successful in progressively monetising its business and reducing incentives.
Although it faces tough competition with competitors such as Sea Ltd’s Shopee growing rapidly, MercadoLibre’s active users reached 139.5 million for its entire ecosystem which provides for ample growth opportunity as it is estimated that there are 652 million people in Latin America of which 407 million are internet users.
Similarly, MercadoLibre has also seen valuations come down significantly and is now trading at a P/S of just under 7x. With its high growth rate and market leader positioning, MercadoLibre is the way to go for an exposure to Latin America.
3) Microsoft Corporation (Nasdaq: MSFT): -23% from ATH
Microsoft made a huge play for the gaming industry and the metaverse future with the announcement of an all-cash acquisition of Activision Blizzard. Once the transaction is completed, it will propel Microsoft to 3rd place in the gaming industry and the deal will be immediately accretive to Microsoft’s bottomline. It will also complement its existing personal computing segment which includes the Xbox
Microsoft’s Azure Web Apps is also the number two cloud computing service provider globally after Amazon Web Services and will likely be able to record strong compounded growth due to its position.
In addition, its core segments such as the productivity and business process segment which includes products such as Microsoft Office, LinkedIn and Dynamics 365 are a stable source of income with continued growth.
4) Micron Technology (Nasdaq: MU): -29% from ATH
Micron, one of the world’s top producers of DRAM and NAND memory chips is one of the most attractive semiconductor plays with a favourable P/E valuation of 12x and forward P/E of 6.5x. It controls about 25% of the DRAM market as of 3Q21, up by 4% percentage points QoQ. With such a substantial market share increase, this means that key competitors such as Samsung and SK Hynix have likely given up some market share to Micron.
The market share increase was likely due to Micron’s claim to a technology lead over its rivals with the D1α DRAM which is the first sub-15nm DRAM product. In this fast moving industry, obtaining and maintaining a technological lead would mean that the company would be well placed to supply its chips to the latest products. For example, the adoption of the DDR5 RAM is expected to overtake its predecessor DDR4 by 2023. These DDR5 RAMs would likely use the D1α DRAM chips that Micron is able to supply and would command a higher price point.
This means that Micron is attractive as it can command higher demand and higher prices to mitigate against stiff competition from its rivals and the highly cyclical industry.
5) Tesla Inc (Nasdaq: TSLA): -33% from ATH
We end this post with one of the most controversial stock in recent years, led by the eccentric genius Elon Musk. In the past, Tesla was dogged by issues such as meeting production targets and even an SEC subpoena over Elon Musk’s tweet.
While some may take the view that Tesla is still overvalued, Tesla has also proven its mettle, outperforming its production targets and continuing its market leading position in the EV space with its first mover advantage.
While Tesla commands a high P/S of 15x and has a market capitalisation that is equals to many car manufacturers added up, it has a strong balance sheet and an enormous super charging network with more than 30,000 super chargers that it has invested more than $8 billion and many years to build.
Finally, Tesla has a one-man marketing machine known as Elon Musk as it continues to spend $0 on advertising annually while its competitors such as GM and Ford spend between $2-3 billion annually.
Buy the dip..?
Months of market weakness has led to many strong US tech stocks correcting more than 20% from its ATH. Stocks like Amazon and Microsoft have multiple segments driving its growth globally with its market leading position. Additionally, on top of having a market leading position, companies like MercadoLibre provides an exposure to Latin America, one of the fastest growing regions with plenty of upside.
Micron is a stock that has a world leading technology and stepping ahead of bigger rivals such as Samsung and SK Hynix. It could also further increase market share in the next few years with its superior technology.
Finally, Tesla continues to have a strong following, led by Elon Musk. However it is not just Twitter fodder but also has unique strengths from its first mover advantage into the EV space.
However, while these stocks may present strong fundamental reasons for a buying opportunity, due to the immediate negative macro sentiment, investors may face a situation where the market continues to fall in the short term after they enter the stock.
Cheng shares how he valuates US tech and SaaS stocks in the current sentiments to find highly discounted stocks, you can join him at his next live webinar to learn more.