No one is going to look back on the Covid-19 pandemic with a sense of nostalgia. But there’s no denying the pandemic era has been a profitable period for equity investors generally, and tech holders in particular. The Nasdaq Composite is up 18% in 2021, after a 43% rally in 2020. Almost everything worked. Now it gets harder.
We’ve already seen cracks emerge. Many of the bubbly “stay-at-home” plays that led the market in 2020 have deflated, with declines of 50% or more for Zoom Video Communications (ticker: ZM), Peloton Interactive (PTON), Roku (ROKU), Chegg (CHGG), Chewy (CHWY), and DocuSign (DOCU). Meanwhile, expectations for higher interest rates have triggered a reversal in high-multiple growth stocks that might not be over. The ARK Innovation exchange-traded fund (ARKK), run by hypergrowth fan Cathie Wood, is down 36% since Nov. 1.
Doug Clinton, managing partner at the tech investment firm Loup Ventures, thinks the landscape will remain challenging in 2022, at least for the first quarter. “You want to be on the side of the Fed,” he says. “We’re going to stay cautious ahead of rate hikes.” Clinton estimates that for every full percentage point increase in rates, the risk to tech stock valuations is 10% for the megacaps, and 20% for higher risk companies. “2022 might be the year of the discerning investor, after the year of the meme investor and the SPAC speculator,” he says. “Prices matter again.”
Paul Wick, portfolio manager of the Columbia Seligman Communications and Information Fund, makes a similar point. “The easy money monetary policy we’ve had for a long, long time is transitioning into something far less easy,” he says. “The environment sets up positively for short-duration assets—companies that are profitable and cash generative now as opposed to in five or 10 years. Growth stocks—unprofitable growth stocks—have outperformed for a few years. But with rates looking like they’ll be rising, the reversal this year has further to go.”
Dan Niles, a one-time sell-side hardware analyst who now runs the Satori Fund, a tech-based hedge fund, says his top pick for 2022 is… cash.
His view is that the market has benefited from “massive, unprecedented” Fed stimulus. “You can get away with that until you get inflation and it starts to hurt the population of people who do not own stocks,” Niles says. “And now you’re staring down the barrel at a nearly 40-year high in inflation, and some of those factors are not transitory.” In particular, he thinks wage and housing inflation are here to stay. He’s short the S&P 500. “It will be a tough year for anything in tech.”
But tough does not mean impossible. Here are a few ideas for 2022:
Get loud on the cloud: The cloud remains the single biggest trend in enterprise computing, and shows no signs of slowing. Public cloud players—Amazon Web Services, Microsoft Azure, and Google Cloud—are showing huge growth. As Andrew Bary notes in this week’s cover story on Barron’s favorite stocks for 2022, AWS alone could be worth $1 trillion or more. Meanwhile, Oracle (ORCL) continues to expand its own cloud business aggressively. And Facebook-parent Meta Platforms (FB) has pledged to spend $10 billion this year on the metaverse. A considerable chunk of that will go toward infrastructure. Recent strong results from networking hardware plays Arista Networks (ANET), Ciena (CIEN), and Cisco Systems (CSCO) should continue. Evercore ISI analyst Amit Daryanani says he recommends all three stocks.
Ante up: Chips remain in short supply, amid booming demand for smartphones, PCs, electric vehicles, and cloud infrastructure. There isn’t enough capacity to meet that demand, and chip makers are moving aggressively to expand. But building fabs takes time. Chip stocks outperformed in 2021 and should rally further in 2022.
Sung Cho, who co-manages a group of tech funds at Goldman Sachs Asset Management, likes both ON Semiconductor (ON) and Wolfspeed (WOLF) as plays on the demand for automotive chips, as well as KLA (KLAC) in the semiconductor equipment sector.
Wick is bullish on auto semis as well, noting that U.S. car dealers have just 20 days of inventory on hand, less than half the historic level. He points out that even with flat unit sales, demand for car-related chips will rise as the semi content per vehicle increases. Wick’s picks include Analog Devices (ADI), Microchip Technology (MCHP), NXP Semiconductor (NXPI), and Japan-based Renesas Electronics (6723.Japan). In equipment, he likes both Applied Materials (AMAT) and Lam Research (LRCX).
Turnarounds: Loup’s Clinton likes Coinbase (COIN)—down 20% year to date—as a pick-and-shovel play on crypto that doesn’t require Bitcoin speculation. He thinks Coinbase could become “the bank of the metaverse,” which makes it a bet on two memes at once.
Want to think bigger? Wick likes Intel (INTC) as a turnaround, noting that at a $200 billion valuation, the stock trades for less than three times forward revenues, versus nine times for Advanced Micro Devices (AMD) and 24 times for Nvidia (NVDA). Wick thinks Intel’s valuation should get support from the pending spinoff of its MobileEye autonomous driving unit. “All the feedback I get is that [CEO] Pat [Gelsinger]’s strategy is the right one,” he says. “The view in the Valley is that Intel is doing the right things.”
Write to Eric J. Savitz at firstname.lastname@example.org