Following a 2019 in which legions of tech stocks saw giant gains, where should more risk-sensitive tech investors look?
Here's a look at a few ideas that I think have reasonable risk profiles given their valuations, competitive strengths and growth opportunities. Two things are worth keeping in mind here:
- "Low risk" isn't meant to imply "no risk." Macro and/or company-specific issues could still spell a disappointing year for one or more of these companies.
- As I mentioned in my column on Monday, there's a good case for waiting until a correction arrives before making new purchases, given how markets have melted up to end the year.
Idea No. 1: Amazon.com (AMZN)
Valuation: With Amazon's shares currently at levels first hit in the summer of 2018, the company now has an enterprise value (EV - market cap minus net cash) equal to 26.3 times its 2020 free cash flow (FCF) consensus estimate, and 20.5 times its 2021 FCF consensus. But this doesn't tell the full story, since Amazon remains quite comfortable sacrificing some near-term profits and cash flow in the name of making big long-term bets.
What's Working in Its Favor: U.S. e-commerce is still growing around 15% annually, and Amazon is still gaining some share within the market. India and Latin American are major international growth opportunities.
Amazon Prime, the seller marketplace and Amazon's massive fulfillment and logistics infrastructure remain large moats -- and those moats collectively got bigger in 2019 as Amazon carried out its one-day Prime shipping initiative and significantly grew its in-house delivery operations. AWS and the e-commerce ad business both still have big competitive strengths and large growth runways.
Idea No. 2: Booking Holdings (BKNG)
Valuation: With Booking trading near levels first reached in mid-2017, the online travel giant has an EV equal to 16.3 times its 2020 FCF consensus, and 14.5 times its 2021 FCF consensus.
What's Working in Its Favor: Global online travel spend continues growing at a steady clip. Booking's scale, consumer mindshare, R&D investments and relationships with hotel owners all remain competitive strengths -- particularly in its core region of Europe, where a more fragmented hotel industry gives it more leverage with suppliers.
The Asia-Pac region and the home/vacation rental market are key growth opportunities. Relative to archrival Expedia (EXPE) , Booking is less vulnerable to the ongoing shift in Alphabet/Google (GOOGL) travel search traffic from organic (unpaid) clicks to ad clicks. Stock buybacks continue boosting EPS.
Idea No. 3: ON Semiconductor (ON)
Valuation: ON has an EV equal to 15.3 times its 2020 FCF consensus, and 14.7 times its 2021 FCF consensus. The analog/mixed-signal chipmaker's stock did quite well in 2019, but it's still only at levels first reached in early 2018.
What's Working in Its Favor: ON's large automotive chip business should see healthy growth in the coming years, and is well-exposed to trends such as electric car and advanced driver assistance (ADAS)/autonomous driving adoption. The company also has growth opportunities in end-markets such as 5G base stations, cloud servers and industrial/IoT hardware.
A $430 million deal to buy a GlobalFoundries fab increases ON's economies of scale, while its $936 million acquisition of Wi-Fi chipset developer Quantenna Communications gives it opportunities to cross-sell Quantenna's products to automotive and industrial/IoT clients. And with the chip industry continuing to consolidate, ON, whose EV is below $13 billion, is a potential buyout target.
