While value can still be found in tech, this is probably a good time for investors to get more selective about what to buy.
Following an October/November rally that was fueled by a mostly solid earnings season and trade deal hopes, the Nasdaq is now up 28% on the year. Tech giants such as Apple (AAPL) and Microsoft (MSFT) have surged to new highs. Likewise, with the Philadelphia Semiconductor Index (SOXX) now up 47% in 2019 following a late-2018 swoon, quite a few chip companies have surged to new 52-week (if not all-time) highs.
Likewise, though many of them are still off their highs following a healthy dose of September and early-October profit-taking, dozens of high-growth software and internet names remain up more than 40% on the year (if not a lot more) and continue trading at high multiples.
What's happened with Roku's (ROKU) stock -- now up more than 420% in 2019 and trading for 11 times its expected 2020 Platform (services and software) revenue -- over the last two weeks is a good case study regarding the market's bullish disposition towards favored tech names. On Nov. 7, Roku plunged due to the light Q4 sales and adjusted EBITDA guidance provided in its Q3 report. But as of this moment, shares are up more than 30% from the lows hit on that day, and also up 10% from where they traded before the Q3 report was published.
And this rally has largely come in the absence of major news, save for the well-received launch of Disney's (DIS) Disney+ service. Roku is believed to get a cut if a consumer signs up for Disney+ on its platform, and might also benefit if Disney uses Roku's promotional services to market Disney+. In addition, Roku has largely held onto its recent gains since announcing a one-million-share stock offering on Tuesday morning.
As I mentioned following Roku's selloff, the Q3 report didn't put the company's long-term growth story into question, particularly given that it featured pretty strong Q3 user metrics for Roku's platform. But all the same, strong Disney+ launch or not, I definitely wasn't expecting Roku to be trading markedly above where it was at prior to the Q3 report two weeks later.
For many tech names that have seen a strong bullish narrative form around them, markets have been inclined to keep bidding shares higher. And as Roku's example shows, this bullish inclination has in some cases remained in place even after a bit of bad news has arrived, just as long as it isn't too bad.
In such an environment, one natural course of action -- at least until some current high-flyers once more go on sale -- is to go bargain-hunting among tech names that have meaningful long-term growth opportunities but have missed out on this year's fun.
ANGI Homeservices (ANGI) , the parent company of Angie's List and HomeAdvisor that remains down 56% in 2019 in spite of the pop it recently got from a Q3 beat, is one name that fits that description and for which the risk/reward still looks interesting to me (interviews with ANGI's CEO and CFO can be found here and here). Dropbox (DBX) , which is down 7% in spite of continuing to deliver strong billings growth and successfully carrying out a price hike, is perhaps another.
One could also go looking for companies that -- although having performed well this year -- still aren't particularly expensive and in some cases have merely erased a lot of their 2018 losses. Among chip stocks, firms such as ON Semiconductor (ON) and Skyworks (SWKS) fit this description.
Browser, news app and microlending services provider Opera (OPRA) , which posted a strong Q3 report last week, is perhaps another. And looking at more well-known tech companies, names such as Alphabet (GOOGL) and Alibaba (BABA) , both of which still don't appear expensive on a sum-of-the-parts basis, make the cut as well.
Though one needs to look a little harder at this point to spot bargains in tech, they're still out there. And some of them could get more compelling if -- as seems quite possible -- markets witness some profit-taking in the wake of their latest rally.
