4 tech stock doorbuster deals

These tech giants are trading at steep discounts to our fair value estimates.

Vikram Barhat 28 November, 2018 | 6:00PM

The spike in stock market volatility that rattled investors in the US and across the world in October has so far continued unabated right through November. Fears over global growth, sinking oil prices, and the US-China trade spat have wreaked havoc on equity markets, hammering the highflying tech sector particularly hard.

The sector, which makes up a quarter of the S&P 500 index, has lost more than 10% since Oct 1, nearly twice as much as the 5.8% losses for the S&P 500, as of Nov 19, according to S&P Dow Jones Indices. The tech-heavy Nasdaq Composite Index was also pitched into correction territory in October as beaten down tech stocks weighed on the benchmark.

Market volatility is an inevitable part of investing. While each episode triggers some panic selling, investors with patience and a prudent approach to investing tend to come out on top in the long run.

Those sitting on the sidelines due to concerns over valuation, crowding and outperformance of large-cap techs stocks now have an attractive opportunity to take positions in some of the biggest tech heavy hitters. Having fallen steadily over the past few months, some of these players are now trading at 18% to 28% discount to their fair value. Here are four examples:

Facebook Inc A
Ticker: FB
Current yield: -
Forward P/E: 18.87
Price: US$132.4
Fair value: US$186
Value: 25% discount
Data as of Nov. 19, 2018

The world’s largest online social platform,  Facebook (FB) boasts more than 2 billion monthly active users. The firm generates 90% of its revenue through advertising, half of which comes from the U.S. and Canada, while Europe accounts for another quarter. Yet to fully recover from the data leak scandal, Facebook has fallen precipitously from its summer high of US$218. However, the company’s third-quarter results show the platform hasn’t lost any of its allure.

“Albeit data and content issues that have surrounded the firm this year, advertisers continue to spend on Facebook as ad loads and ad prices both increased and further drove impressive double-digit growth in revenue,” says Morningstar equity analyst Ali Mogharabi. “The growth in users and user engagement, along with the valuable data that they generate, makes Facebook attractive to advertisers in the short and long term.”

The tech leader’s wide moat, or sustainable competitive advantage, stems from a conspiracy of factors including network effects around its massive user base and vast amounts of user data captured and stored on its various sites and apps.

“Given its ability to profitably monetize its network via advertising, Facebook will more likely than not generate excess returns on capital over the next 20 years,” says Mogharabi, who assesses the stock’s fair value to be US$186, and forecasts a 23% annual revenue growth for the next five years.

Amazon.com Inc
Ticker: AMZN
Current yield: -
Forward P/E: 57.14
Price: US$1524.43
Fair value: US$2200
Value: 28% discount
Data as of Nov. 19, 2018

E-commerce giant,  Amazon (AMZN) rang up US$178 billion in net sales last year, of which more than 60% was generated from online product and digital media content sales. Third-party seller services (18%) and Amazon Web Services (10%), made up the bulk of the rest.

The stock has cratered steeply since reaching an all-time high of US$2050 in September. However, the weakness is likely a short-term phenomenon and doesn’t detract from the fact that “Amazon is the most disruptive force to emerge in retail in several decades,” says a Morningstar report.

The online retailer enjoys unmatched competitive advantage that flows from its operational efficiency, network effect, and a brand intangible asset built on customer service, says Morningstar sector strategist, R.J. Hottovy.

The firm is expected to maintain its market dominance and strong cash flow through its consumer proposition inherent in its services and disruptive technology. “Amazon's competitive position and compelling value proposition should lead to additional share gains in 2018,” forecasts Hottovy, who puts the stock’s fair value at US$2,200, supported by a cheery revenue growth forecast (31%) for 2018, and around 22% annually through 2022.

Microsoft Corp
Ticker: MSFT
Current yield: 1.76
Forward P/E: 24.10
Price: US$101.71
Fair value: US$130
Value: 20% discount
Data as of Nov. 20, 2018

Best known for its Windows operating systems and Office productivity suite, the resurgent global tech leader  Microsoft (MSFT) provides software, hardware and services in three segments: productivity and business processes (Microsoft Office and Dynamics), intelligent cloud (Azure and Windows Server OS) and personal computing (Windows Client, Xbox, Surface, phones and Bing).

The tech heavyweight has made remarkable progress in its cloud business as enterprises move to the cloud. “Azure, Microsoft’s public cloud service, has established itself as the number-two player behind Amazon Web Services,” says a Morningstar equity report. “The company leverages Azure for cloud-deployed applications such as Office 365 and Dynamics 365.”

Cloud computing represents immense opportunities for the tech firm and helps offset declines in its legacy businesses.

“Microsoft will be squarely focused on Office productivity, cloud computing and Azure, artificial intelligence, and the acquisitions of LinkedIn and GitHub--all wide-moat businesses --which supports our wide moat argument for the aggregate business,” says Morningstar equity analyst, Andrew Lange, whose US$130 fair value estimate for the stock implies price/adjusted earnings ratio of 30 times and a 4% free cash flow yield.

Additionally, the company is competitively positioned for new trends such as Internet of Things and artificial intelligence (AI). “The data inherent in Windows, Office, and LinkedIn gives Microsoft an immense base for AI initiatives,” says Lange.

Alphabet Inc C
Ticker: GOOG
Current yield: -
Forward P/E: 22.27
Price: US$1027.39
Fair value: US$1300
Value: 18% discount
Data as of Nov. 19, 2018

Internet media titan,  Alphabet (GOOG) generates 99% of its revenue from its widely used search engine, Google. The company recently reported strong third-quarter results including US$33.7 billion in revenue, a 21% jump year over year, and US$29 billion in ad revenue, up 20% from last year, boosted primarily by YouTube.

Alphabet’s network effect, accumulation of data and expertise in search algorithms are expected to continue to drive growth. “This will help the firm remain the behemoth in online advertising and make further headway in consumer hardware and enterprise cloud businesses,” says a Morningstar report, adding that other initiatives, particularly its autonomous vehicle division, Waymo, hold promise for more future upside.

The company is well positioned to benefit from the accelerated adoption of mobile devices, which has led online advertisers to follow their target audience onto the mobile platform. Google has successfully tapped into the trend “on the back of its Android mobile operating system’s growing market share, helping it drive revenue growth and maintain its leadership in the space,” says Mogharabi, who puts the stock’s fair value at US$$1,300, and projects continuing double-digit annual revenue growth through 2022.

The wide-moat firm’s robust ecosystem continues to grow as “the firm utilizes technological innovation to improve the user experience in nearly all its Google offerings, while making the sale and purchase of ads efficient for publishers and advertisers,” Mogharabi notes.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Alphabet Inc Class C1,243.64 USD0.05
Amazon.com Inc1,777.43 USD0.57
Facebook Inc A189.61 USD0.38
Microsoft Corp140.41 USD-0.82

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Vikram Barhat

Vikram Barhat  Vikram Barhat is a freelance writer.