Is tech back? Can we get into tech stocks during this market's weakness, where again we fell on light volume?
I waffled on this all weekend, trying to figure out whether tech could ignite the way so many other groups have. Remember, we have seen energy come off its lows, tremendous moves in the insurers, the utilities, the real estate investment trusts, medical devices and home-related stocks.
But tech's been threatening to break out despite the overall downbeat nature of some of the larger, best-known stocks, including almost all the banks, biotechs, big pharma and some select, fast-growing techs.
But today cinched it. Microsoft (MSFT), with its $26.2 billion acquisition of LinkedIn (LNKD) for $196 per share, a 49.5% premium from Friday's price, made my mind up for sure. Tech's back and back in a way that makes it so this kind of oil-related overseas imported decline is giving some excellent opportunities to do some buying.
This is fabulous news for the market because tech's almost 20% of the S&P 500 and it's been in the doldrums, with the exception of a few high-profile names, pretty much for ages.
First, let's talk about this LinkedIn deal. LinkedIn is one of those companies that the market always has a hard time trying to value. Coming into Monday's session, the social networking site company was valued at about 33x earnings. That's almost twice what the average stock is worth and yet the company has been signaling that its growth has been slowing somewhat. In fact, in a devastating February quarter, LinkedIn let investors know that it saw growth slowing from the 30s to the 20s and that there were macro issues slowing things down -- code for this company is a lot more sensitive to worldwide growth than people thought. In an instant, the stock fell from $193 to $108 and then ticked at $100 not that long after, and while it was able to claw back to $130 after a decent recent quarter, that's still a far cry from where it was before the February breakdown.
It's worth noting that the $196 price tag Microsoft is paying is $3 above the breakdown price, but it is still down 14% for the year.
So given that it is off the highs, did Microsoft get a good price for a company with 433 million users that had 45 billion page views in the previous quarter, a pickup of 8 billion over the quarter before?
Depends. Most of the analyst reports described it as an aggressive overpay, one of those acquisitions that won't be additive to earnings for a couple of years out. I read a bunch of pieces that talked about how it's a waste of money or that there were better acquisitions to make or that bigger dividends or buybacks made more sense.
But let me tell you how I see it. First, Microsoft had more than $100 billion in cash in its coffers coming into today. With the stock down almost 10% for the year and a yield that's almost 3%, you have to ask, is that cash doing anything for the company? I would say, given the paltry returns, no. Therefore, I think that anyone who thinks this is a major blow to the opportunities open to Microsoft is just plain nuts. No, the money wasn't burning a hole in Microsoft's pockets, but it wasn't doing anything for Microsoft's stock.
Second, because of the peculiar legacy of Microsoft's former CEO, Steve Ballmer, the company basically sat out all the big trends in tech: social, mobile and the cloud. That's a remarkable trifecta of missed opportunity.
We know that coming into Microsoft's last quarter the cloud had been growing pretty quickly and looked like it was on target to become something that obscured the endlessly slowing Windows personal computer business. But the quarter most recently reported saw Microsoft's cloud business run at a declining rate of growth, at the low end of the company's targets, and that caused a real decline -- $55 to $51 in a single session and then more pain, down to $49 a few days later. That's a big move for a slow stock like Microsoft's.
That's all over now. With this acquisition, Microsoft's now in the social, mobile and cloud conversation, especially given how LinkedIn is truly global, in 200 countries, and has a rapidly growing Chinese business that Microsoft covets. Plus the total addressable market is huge. Right now it only has about 4.5% of the global social media share and 106 million monthly unique visitors. I think that number can grow hugely when combined with Microsoft's base.
More important, LinkedIn brings rapid growth to Microsoft. Sure, LinkedIn's growth might be downshifting, but its slowing growth is still much faster than anything Microsoft has going. Now, I didn't like the concept on the conference call between the companies that somehow LinkedIn's going to be the social glue uniting all the disparate groups within Microsoft. But that doesn't matter. I care about jump-starting growth, and after that last disappointing Microsoft quarter, I no longer worry about that. And that's the real beauty of the deal.
Now, how about the rest of tech? We had a bunch of tech companies rally on the news of this acquisition, chiefly other companies that have mobile, social and cloud characteristics that seem like they have the possibility of being taken over. Workday (WDAY) and Adobe (ADBE) put on some nice moves, as did Salesforce.com (CRM), which initially saw its stock drop a couple of points on the news given that there was some speculation that Microsoft was going to buy Salesforce.
But CEO Marc Benioff recently came on Mad Money and pretty much point-blank denied that report. So anyone who might have been in it for the takeout had little reason to stick around. However, other buyers came in, I think, because Microsoft's buy verifies the logic behind Salesforce's rich valuation.
What I am focused on, though, is the resurgence in other parts of tech, notably the semiconductors where Broadcom (AVGO) and Nvidia (NVDA) have really taken off, but Texas Instruments (TXN), thought to be an also-ran, continues to pick up adherents. Applied Materials (AMAT) and Lam Research (LRCX), the big semiconductor equipment companies, have seen their stocks run. As have Tech Data (TECD), Arrow (ARW), Sanmina (SANM) and Hewlett Packard Enterprise (HPE). That's quite a list.
Of course, missing from the list is none other than FANG. In fact, the stock of Facebook (FB) got hammered by a short recommendation by Andrew Left, a smart guy who earlier had told people to skedaddle from Valeant (VRX) about 120 points ago. Unlike Valeant, Left sees no smoking gun, but the stock took it on the chin anyway. Amazon (AMZN) got no traction despite a hard push by big-time backer Piper Jaffray. Netflix (NFLX) had what amounted to a rate up day and Alphabet (GOOGL) did nothing. But Apple's (AAPL) stock declined more than 1% despite the big developers' conference, so it's not like new old tech is anything to write home about. (Facebook, Alphabet and Apple are part of TheStreet's Action Alerts PLUS portfolio. Amazon is part of the Growth Seeker portfolio.)
None of this matters if the stock market keeps going down. You will just be catching a falling knife that is a stock even as it is backed by tech.
Still though, keep tech in mind. Microsoft's so-called overpay for LinkedIn, I think, is a win for both parties and I suspect we will see more deals like it in the tech space. There are just too many stocks in a sector desperate for consolidation.
