Coronavirus Roundtable - Tech Has Shined, But Watch Out For Q2

By SA Marketplace:

Markets have settled and recovered from the initial shock of the coronavirus spread and the response of governments around the US and the world to lock down the economy. But while the major US indices have approached, if not quite matched, the fabled v-shaped recovery, there are still plenty of questions left for investors.

The disconnect between the markets and the economy has become a cliche, which doesn't change its validity. The size of stimulus in the US has been unprecedented. As governments start to reopen, it's to be seen whether we will see a second wave of cases. And we don't yet know how quickly people will go back to spending, and what the engine of the economy will be in this uncertain period.

To suss out all these uncertainties, we're starting a second round of our coronavirus roundtable series. We'll be looking at some of the major sectors of the market that are in the market, overall market and macro outlooks, and niches that may deserve investors' attention.

We turn to tech. Last time we covered it, we wondered about whether tech would be a safe haven. As we stand on May 22nd, the Nasdaq is up year to date, so a safe haven indeed - both the secular growing dominance of the sector and the nature of this period, with lockdowns and work from home requirements that play into the sector's hands, have caused tech to be even more of an outperformer. What's going on and can it last? We have a big panel to weigh in on the developments:

  • Andres Cardenal, CFA, author of The Data Driven Investor
  • Victor Dergunov, author of Albright Investor Group
  • Elazar Advisors, LLC, author of Nail Tech Earnings
  • DM Martins Research, author of Storm-Resistant Growth
  • From Growth to Value, author of Potential Multibaggers
  • Joe Albano, author of Tech Cache
  • EnerTuition, author of Beyond The Hype
  • Cestrian Capital Research, author of The Fundamentals
  • Mark Hibben, author of Rethink Technology
  • Steve Auger, author of Digital Transformation
  • Damon Verial, author of Exposing Earnings
  • App Economy Insights, author of App Economy Portfolio

Seeking Alpha questions are in header font. Author disclosures are available at the end of the article. Questions were sent out on May 19th and answers sent back by May 21st.

The Nasdaq and the XLK are in the green year to date. What do you make of that within the broader economic climate?

Andres Cardenal, CFA: I was expecting tech stocks to do much better than the broad market during the pandemic, and this is in fact what we are seeing so far. Technology is a necessity nowadays, and many of the top players in the sector have strong competitive advantages, solid revenue growth, abundant cash flow generation and pristine balance sheets. For these reasons, I am not surprised at all to see tech outperforming in this environment.

Victor Dergunov: Microsoft (MSFT) and Apple (AAPL) account for over 40% of XLK's weight, and big tech has been leading markets higher. The huge mega-cap Nasdaq names have been extremely resilient in these difficult times. I think Microsoft is probably the best positioned big tech company right now. Great earnings, a monopolistic core business, strong cloud growth, and other factors put Microsoft in a very advantageous position. Amazon (AMZN) is also quite strong with robust online demand. However, Q2 earnings could be far worse than expected for hardware business segments. Also, ad spending could slow notably. Therefore, we could see some declines into Q2 earnings season this summer.

Elazar Advisors, LLC: Fundamentals still have been good. The second half risk doesn't matter so much to stocks yet with the Fed at full tilt.

DM Martins Research: In many cases, tech companies have benefited from this particular crisis so far, which in turn has been very unique compared to previous ones. While technology companies could eventually feel the negative impact of a "traditional" recession, they have found strength in work-from-home and e-commerce trends up to this point.

The other key factor to consider is that the Nasdaq and XLK are particularly exposed to Big Tech, particularly FAAMG -- over 40% allocation in each fund. The success of these companies transcends the events of 2020. Because they are dominant in their fields and boast strong balance sheets, they seem to be perceived by the market (rightfully so, in my opinion) as safer bets in this environment of uncertainty.

From Growth to Value: The Nasdaq is in the green, while the S&P 500 is still down 20%. Investors acknowledge that tech stocks in general and software stocks in particular are more protected from the devastating consequences of the Covid-19 pandemic and that this is not a temporary shift, but the prelude to a more general one. Throughout human history, periods of crisis have always accelerated shifts that had already started before the crisis. I think the same will be true here. Location-independent, cloud-based software has proven now that it is indispensable for our modern life and work. The SaaS economy is still in its infancy and 'aaS' will spread outside of software more and more to, for example, transportation, retail, healthcare etc.

Joe Albano: Not many areas of the economy can benefit from everyone staying at home and doing their work and learning remotely. Only the tech industry can see that kind of widespread benefit. Look at Netflix (NFLX) and Zoom (ZM) for an idea of how the growth in subscribers can explode when lockdowns shift the paradigm. Additionally, the rebound for other tech that was impacted negatively or indifferently from the pandemic will recover quicker than other areas of the economy. Together the look-ahead factor of the market has the green light.

EnerTuition: Markets today are largely decoupled from the performance of the underlying stocks and are being driven more by cash inflows. This creates an environment where PEs rise across the board and bubble stocks inflate much more than market.

Cestrian Capital Research: Investors now see tech as a safe home for capital, for at least two reasons. Firstly, most of the largest companies in the US by market capitalization and (in particular) by cash reserves are tech companies, so the stocks of those larger companies - Microsoft for instance - comprising the bulk of the Nasdaq and its proxy ETFs' market capitalization have benefited from what investors perceive to be a flight to safety in the current environment. Secondly. the high-growth, high-beta cloud software stocks are expected to maintain growth rates well above the market average - and investors now understand that as those cloud stocks mature they tend to generate prodigious cashflow even whilst delivering high rates of revenue growth. So if as an investor one is looking for growth upside, with some downside protection from cashflow, cloud software is the place to look. This is no longer specialist knowledge and as a result, money has flocked to this cohort, further elevating the NASDAQ and related ETFs.

Mark Hibben: At this point, the economic downturn is looking much more severe than in early April. While I believe bullishness for the tech sector is justified by virtue of its long-term prospects, I currently expect a correction in the near term. This view is predicated on my belief that the market never thinks long term, so therefore optimism must be based on the expectation that recovery will be V shaped. Most economists don't expect this, however, and neither do I. When does the market start to realize that the recovery will be U shaped at best? We probably need a couple months more economic data to see where things are going. If, as I expect, the data confirm a slow recovery, then we'll probably see a correction in mid-Summer.

Steve Auger: The Nasdaq and the XLK are in fact in the green but let's be clear. The tech leadership is entirely due to the software industry, nothing else. Hardware technology (XTH) is in fact down 16% for the year, lagging the general stock market. Semiconductors (SOXX) is down 3%. Compare this to the First Trust Could Computing ETF (SKYY), up 12% for the year.This tells me that the bullishness is almost entirely due to the work-from-home shift and acceleration of the digital transformation movement. Apart from the software industry which is driving the fourth industrial revolution, I expect to see some general optimism this summer as the Covid-19 panic dissipates with the hotter weather and with the ongoing sugar rush from our governments. I don't like to be cynical, but the government's response to the pandemic is essentially vote-buying for the upcoming election. Once we are into November and the election is over, and the virus re-emerges with colder weather we will then begin to experience the true effects of the pandemic and global recession.

Damon Verial: Tech stocks have been outperforming the market, as evidenced by the Nasdaq index and its Nasdaq-100 ETF, the latter having recently hit $100B in assets under management two weeks ago. This is the second-most highly traded ETF, and clearly we are seeing more buying than selling. But this buying-frenzy isn’t necessarily bullish; it could just be a sign that investors want to diversify across large-cap tech stocks instead of having to pick-and-choose among the stocks that are going to possibly continue upward versus crash hard.

App Economy Insights: As Satya Nadella - CEO of Microsoft - put it, “we’ve seen two years’ worth of digital transformation in two months. From remote teamwork and learning, to sales and customer service, to critical cloud infrastructure and security.”

FAANMG stocks are more than 40% of the Nasdaq and they are all seeing accelerated tailwinds with user engagement stronger than ever. In this context, it makes perfect sense to see the Nasdaq outperform the S&P 500.

What are your takeaways on earnings season for the tech sector?

Andres Cardenal, CFA: In general, the numbers were much better than most analysts were fearing, and many companies in online commerce, internet, and software actually delivered blowout numbers. Looking at the big picture, this has been a solid earnings seasons for tech stocks considering the circumstances. Going forward the most important factor to watch will be the length of the recession, because a long recession can be much more damaging than a short lived one, irrespective of the magnitude of the decline in economic activity.

Victor Dergunov: If we look at the "Big Five", Apple, Microsoft, Alphabet (GOOG) (GOOGL), Facebook (FB), and Amazon, Q1 earnings were fair. Microsoft's were good with beats on both top and bottom lines. Amazon missed, and reported that all their profits for Q1 were going towards Coronavirus expenses. Alphabet's were mixed, and Facebook's were relatively strong, yet the company mentioned that ad revenues slowed notably in late Q1. I expect Q2 earnings to be tough due to slowdowns in ad spending and in overall business activity, even for the tech giants, and there is still a great deal of uncertainty for H2 and 2021. Thus, I expect a leg down for the tech sector sometime this summer.

Elazar Advisors, LLC: There was a pullforward in demand for many companies that sell to OEMs. Equipment builders in smartphones wanted to protect against being out of inventory so bought ahead of demand, way ahead of demand. That can set up a demand cliff for the second half, too much inventory and no demand.

DM Martins Research: The sector has been one of the biggest winners coming out of earnings season. Big Tech earnings week was generally strong, with Microsoft and Alphabet delivering impressive results and Apple managing the headwinds well. The larger companies have been able to capitalize on the silver lining of the current crisis, and I have no reason to believe that this will change going forward.

From Growth to Value: The earnings showed that tech had only a small impact in Q1 and that growth in the tech sector was still very strong. Of course, there will be more impact in Q2, but I think every investor already knows that. Again tech will show that it will be more resilient to the crisis and vital for the economy.

Joe Albano: Companies who provided guidance (even in-line or surpassed) in April and early May got punished while those who withdrew or didn't provide guidance got a free pass. And, it shows in the returns of stocks like Apple, AMD, Intel (INTC), and Facebook.

EnerTuition: Earnings season was as expected. Tech companies clearly held up better than the overall market. However, many companies reduced guidance or pulled guidance altogether. This is prudent as the visibility has reduced dramatically. What is surprising is that stocks are higher today, post earnings, than they were a quarter back. This is inconsistent with what we have heard in earnings calls. Very few companies have better prospects today than they did last quarter. Market is not reflecting this reality.

Cestrian Capital Research: Q1 earnings were for the most part as we expected. Most companies said "Q1 weakened towards the end, Q2 is likely to be worse than Q1, and, oh, we can't or won't say how 2020 is likely to play out". The market lapped it up. One company in our coverage universe, Iridium Communications (IRDM), made the grave error of actually walking the market through how 2020 would likely play out. It was positive guidance - they said that both revenue and earnings would be up in 2020 vs. 2019, more than can be said for most companies. The stock was duly hammered! Lesson - best to keep folks guessing. Q2 numbers we think are likely to be ugly and we shall have to see what the macro and political environment is at the time to figure out how that impacts prices.

Mark Hibben: Generally, tech companies that I follow did very well despite the pandemic. Even companies that warned of a negative impact, such as Apple and Microsoft, ended up exceeding analyst expectations. Apple was the worst hit, however, showing its vulnerability both to a downturn in consumer spending and to supply chain disruption.

By and large, the tech sector has demonstrated its resilience in the face of the pandemic. Work/learn at home has stimulated some PC sales and numerous internet delivered content, software, and services. The cloud services of both Apple and Microsoft did very well.On the other hand, a persistent theme of virtually every company in the RT Portfolio was uncertainty/pessimism about what lay ahead, especially in the second half of the year. Most see a lingering negative effect on revenue due to the global economic downturn. Apple refused to offer guidance, even for the current June quarter. ASML Holdings (ASML) also refused to provide guidance. Any statements regarding the second half were generally not very hopeful. The markets have taken a “no news is good news” approach to the lack of guidance, which I think is a mistake.

Steve Auger: Most software companies only have limited experience with the pandemic at the time of Q1 earnings and reported minimal impact. Software companies in general are quite conservative regarding guidance and have either withdrawn guidance for the year or made adjustments for the current economic climate.

Within the software industry, there are obviously market segments expected to perform poorly. I am thinking of companies such as Eventbright (EB) and Expedia (EXPE), through no fault of their own are being devastated by the current events. Other companies that rely on recurring revenue and cloud-based offerings will be relatively unaffected.

Damon Verial: The macro side of things is strongly bearish. The reduction in oil prices will certainly deflate corporate earnings. Loans have dropped. The yield curve is weird. And, quite frankly, we simply do not know the duration of this pandemic. Tech will not be spared. The big boy tech stocks continue to outperform the market, hinting at mean reversion. When these stocks – especially tech stocks – mean-revert, they will drag the general market down with them. This has happened many times in the past, and so we should trust the data (and be bearish) if we are logical.

App Economy Insights: Big tech was able to grow Y/Y in Q1 CY20, even Apple despite its strong exposure to China (impacted early by the pandemic). Amazon, Google, Microsoft, Facebook have delivered double-digit growth. Better yet, April is not as bad as most feared based on earnings calls. With most companies withdrawing guidance, the next earnings season is likely to create a lot of volatility. It could create fantastic opportunities for investors who are paying attention when the time comes.

There's been a mixed bag of results for digital advertising companies both for March and the initial weeks of April. What are you seeing if you follow these companies, and what has surprised you, if anything?

Andres Cardenal, CFA: Industry leaders such as Alphabet and Facebook talked about a stabilization in demand for April. If this trend is sustained, it would speak very well about the underlying strength in these businesses. The Trade Desk (TTD) is also doing quite well as it benefits from the shift towards programmatic advertising. Advertising is obviously a much cyclical industry, so this is a headwind for the sector in the short term. But online advertising is also stealing market share away from traditional advertising, and this is a powerful driver in the long term. When all is said and done, companies like Alphabet, Facebook, and The Trade Desk will emerge from this crisis in a stronger than ever shape.

Victor Dergunov: I noticed some companies, including Facebook mention a slowdown in ad spending due to the Wuhan Coronavirus. I expect this trend to continue and intensify throughout Q2. The real question is how ad spending will fare in H2 and in 2021. I suspect the virus will impact consumer sentiment and spending for some time, thus we could see worse than expected ad revenues in Q2 as well as in H2, and possibly throughout 2021. The fact that many companies that are heavily dependent on ad revenues are trading around all-time highs is surprising to me. It seems that the market is underestimating how severe the ad spending slowdown may be.

Elazar Advisors, LLC: The ad market dried up. Stocks are trading ok because of the huge Fed stimulus. Without that these and many other tech stocks would be way down.

From Growth to Value: If anything has surprised me, it is that the results were actually better than I expected for the ad-focused tech stocks. Yes, there was a certain impact and that impact will be even bigger in Q2. Over the longer term, I think you will see that this is a shift-moment too and more and more advertisement dollars will be spent digitally. About 25% of television hours are watched on streaming platforms, but less than 5% of ads have moved to those platforms. Then you know what will happen because advertisers always follow potential customers. Jeff Green, The Trade Desk's founder and CEO, calls this 'a watershed moment'.

Joe Albano: The bottom was in back in late March and early April. From there growth will return as small and medium businesses see the light at the end of the tunnel to get the shop running again and the marketing engines dusted off. Turning back on digital advertising is immediate and with higher engagement still lingering, it will show a bullish turn in the expectations of digital advertising companies as well as the return on investment for advertisers. There is no quicker recoverer in marketing than using your smartphone for an immediate return.

Cestrian Capital Research: In one of the Coronavirus round-tables we contributed to, we were asked to name three stocks we would buy when emerging from this crisis - we named The Trade Desk as one of them. We've been surprised how well that stock has recovered, given the commentary from all corners about weakness in the ad market. Kudos as always to TTD's differentiated business model and its skillful management team. There could be weakness ahead for the stock on Q2 earnings but we think the company can keep outperforming the other ad-driven stories (Facebook, Google etc) because its model is more in tune with the Zeitgeist than are the big names. FB and GOOG grew up on blasting all kinds of ads to all kinds of users. TTD's DNA is based on selective content to selected users. That serves the brand owner and the consumer better, we think, and that will continue to propel TTD forwards. But even so, the rapid bounceback of the stock surprised us!

Mark Hibben: I don't generally follow the digital advertising companies, but I did note that Apple reported a downturn in its advertising revenue, which it attributed to the general economic slow down.

Damon Verial: I’ve taken this overbought opportunity in tech to add shorts to my portfolio. One sector I particularly like shorting now is digital advertising, as the closure of businesses lead to lower advertising spend. Twitter (TWTR) is my favorite short here because they’re a big-name company that has consistently underperformed with their implementation of advertising on their platform. Also, check out my forthcoming thoughts on Snap (SNAP), which I see as a poor-man’s Instagram (article pending).

App Economy Insights: Initial data from eMarketer was suggesting digital advertising budgets would go down more than 20% in April. When you listen to theearnings callof a company like Pinterest (PINS), the revenue in April was only down 9% Y/Y. I think the main surprise here is that the numbers were not as bad as feared. The shift from traditional marketing (linear TV, theaters or radio) to digital has partially offset budget reductions.

The software as a service sector seems to be going from strength to strength, with many companies talking about an acceleration of the digital transformation and cloud migration. How much do you think this period is a pull-forward of demand, and how much of this is genuinely new demand?

Andres Cardenal, CFA: The demand is genuine and it has always been there, the crisis has only accelerated the trend. For the market leaders in the sector, this is a very good thing, because it provides the opportunity to leverage on their resources and grab a large share of the long term addressable market opportunity.

Victor Dergunov: Cloud is a great business with enormous potential going forward. I think it's both a pull-forward of demand as well as new demand coming on line. I expect the cloud segment to remain strong going forward. My one concern is that many smaller cap cloud companies are trading at stratospheric valuations.

Elazar Advisors, LLC: There is a transition to work-from-home which is forcing enterprise customers to rethink their tech infrastructure. It's something legitimate.

DM Martins Research: I believe it is both, which is highly bullish for companies in the space. I think that the migration to cloud and digital service platforms was inevitable, but many customers may have been complacent to adopt these solutions more quickly. Now, a sense of urgency has been created.The good news is that any new user added today and retained for the long term will generate revenues not only tomorrow, but both today and tomorrow. The SaaS model has the benefit of creating "duplication of demand" over time, and not simply a shift of it.

From Growth to Value: This is definitely mostly new demand, no doubt about that. Many businesses have now realized that not having a strong web-based presence makes them vulnerable. Companies that didn't have SaaS systems to work from home had trouble doing meaningful work. The number of Zoom meetings exploded, and a lot of small retail shops opened online. This really is a generational shift that already was in the making and now is pushed to the first row by the pandemic. SaaS companies will continue to go from success to success because their services are in the hotspot of change and they are antifragile because they can be reached at all times from anywhere in the world. Besides that, SaaS companies have a very attractive model with several levers. Clients compound year after year and the dollar-based net retention is often 130% in the best SaaS companies. That means they are able to upsell their existing clients by 30% on average every year. That's incredibly powerful. Add to that mix that the margins are very high, sometimes up to 90% gross margins, and you can see why SaaS stocks are valued so much by investors.

Joe Albano: Look at the blogs and press releases from larger companies. More and more companies are going to indefinite work-from-home policies. Companies are going to wonder if they haven't already why they carry the high fixed costs of leases, maintenance, and upkeep of employee offices. For what? This worldwide event forced the hand of all companies to adapt. This is what we call a trial run and the proof of concept is looking pretty enticing for a full-on change. Cloud computing doesn't see true pull-forward events, cloud capacity will always be needed - by the time the original demand reason were to fade, another demand lever is ready to take up the slack.

Cestrian Capital Research: The dawning realization that distributed working may be here to stay has provided further evidence, if it were needed, that the truly total cost of ownership (including all the non-tech stuff, like travel, downtime, etc) of cloud deployments can be significantly lower than client-server, mainframe or other deployment architectures. Cloud server-side workloads and application usage will, we think, continue to ramp much faster than the software market as a whole; it's a given in our view that it will become the architecture of choice for most environments soon. The Covid-19 crisis has likely accelerated some planned migrations and also created new demand - those sectors, such as government, that have struggled with legacy systems in this period (we're thinking of the COBOL developer shortage in New York) may decide they have to go cloud even for old-line systems like payroll or social security.

Mark Hibben: Microsoft certainly felt that the pandemic and work/learn at home was accelerating digital transformation. I think there is some pull forward of demand, especially as it relates to computer and OS upgrades (transition to Win 10). I suspect that the pandemic will leave some lasting structural changes in its wake. The pandemic is forcing us to exploit our communications infrastructure to support remote working and collaboration. In many cases, those who can continue to work from home will do so even as “lock-downs” ease. New technologies such as augmented reality will also facilitate remote working in many cases where in-person work was assumed to be essential. We may see a newly broadened “information economy” in which the workforce is more widely dispersed geographically and free of the need for a daily physical commute.

Steve Auger: There is certainly "pull forward" in the digital transformation phenomenon. But this doesn't mean that the revenue expected next year is simply being moved into this year. The need for transformation won't disappear when the pandemic ends, and companies that have accelerated their transformations won't be stopping the transformation process. Companies with recurring revenue business models will continue to benefit in the future, even though business has been pulled in. You won't see enterprises demanding their PBX's back. Apart from the pull forward effect, there are some areas such as remote collaboration that are experiencing a big increase in new demand. Some of this will subside once the pandemic fades out and workers go back to the office. But, some of this new demand will stick as employers and workers experience the advantages of remote working such as reduced expenses due to commuting and day care.

Damon Verial: I don’t believe the story, to be quite frank. Companies are usually creative with their accounting, as they have many incentives to do so. One method of creative accounting is being unrealistic with receivables, adding those that are unlikely to actually be realized to their balance sheets. I predict many companies will be defaulting on their SaaS payments, and I don’t see this adequately reflected at the moment.

App Economy Insights: With all employees having to work remotely, the need for all collaborative work to migrate to the cloud has been instant for companies that were not prepared. The pent up demand is merely a reflection of what was already in motion pre-COVID. Software has been eating the world for more than a decade, and now the migration to the cloud is poised to be the biggest secular trend for the years to come.

What is something out of this period that you think is a temporary, strictly coronavirus period change in tech, and what is something you think will last beyond this period?

Andres Cardenal, CFA: The slowdown in online advertising - even if smaller than expected - is strictly temporary in my opinion. Online is more flexible, efficient and measurable than traditional advertising, and when economic growth reignites so will the demand for online advertising. Big trends such as online commerce and all kinds of business digitalization are here to stay. The Latin American consumers who started buying via MercadoLibre (MELI) are not going to keep buying via MercadoLibre in the future, and the companies that started using DocuSign (DOCU) to digitalize their paperwork are not going back to the old ways by any means.

Victor Dergunov: I think that most elements are temporary. For instance, demand for hardware will likely decline substantially in Q2, but should bounce back once the economy returns to more normalized conditions. The question is how long the slowdown will last and how severe it will be. If we go through a prolonged recession, then the "temporary period" could last a very long time.

Elazar Advisors, LLC: Temporary: OEMs protecting against supply constraints by buying ahead of demand. Demand should be weak in the 2nd half which can cause orders to dry up later this year. Sustainable: Work-from-home and stay-at-home themes have launched and probably continue. I don't think the public shakes the social distancing cobwebs so fast even when the smoke clears.

DM Martins Research: I think that the demand for tools and services that allow for remote work and social-distant living (e.g. teleconferencing, office productivity, streaming entertainment, internet data, e-commerce, etc.) is most likely to be "sticky". This cat is out of the bag, and I don't think that it is going back in. I don't believe that the COVID-19 crisis created trends in technology adoption that did not exist before -- it merely accelerated them.

From Growth to Value: Nothing will be strictly coronavirus-only, I think. Of course, the number of Zoom meetings will go down,especially the drinks and social calls. But there will still be substantially more Zoom meetings than before the virus. Telehealth will become the norm over the next decade or so, and the trend to be able to do anything from home will only accelerate. Just 20 years ago, we couldn't imagine not leaving the house for shopping or working on projects with co-workers from home. Before this coronavirus period, online sales accounted for 15% of the total sales. The projections for Q2 are 20% and more.That won't go down but will only go up more over time.

Joe Albano: Food delivery will wane once more and more of the population goes back out and restaurants, bars, and gyms begin to open. There will be less of a need to have food delivered to the house, especially when runs to the grocery store are no longer few and far between. Beyond this period we'll see tech continue to encroach on our daily lives - both good and bad in terms of privacy and convenience.

EnerTuition: What is permanent is the change in people's habits. The percentage of the economy that goes online will be much higher post-coronavirus than it was pre-coronavirus. This has several long term consequences - people travel will reduce, freight will increase. There is also likely to be a corresponding sustained push for lower onsite employees. From a commercial real estate perspective, we are likely looking at fewer employees but more space for employee. From residential real estate perspective, there is likely to be a longer term move for bigger houses.

Cestrian Capital Research: We think gaming stocks are likely elevated as a result of more stay-indoors time, and that the earnings multiples will likely fall back a little as the crisis abates. But we think remote-working has experienced a structural acceleration. Videoconferencing has been around for decades (think Polycom, Tandberg) but the impetus to use it has always been weak; collaboration apps (think Lotus Notes) ditto. These things were always too hard to implement and required too much custom development and support for users to want to bother. Now, with providers such as Zoom, Cisco-Webex (CSCO), Slack (WORK) and Microsoft Teams, you need a whole lot less IT staff to deploy and manage the applications; and given that users have learned how to work using these systems, we think the appetite to do so will remain elevated even when airplanes are once again a socially acceptable form of travel.

Mark Hibben: To the extent that the economic downturn suppresses demand for consumer tech, I think this will be temporary, although perhaps longer lasting than people realize. In the long run, the pandemic may have more lasting effects on businesses such as transportation as a service. The impracticality of social distancing in a ridesharing context may renew the appeal of personal vehicle ownership. The concept of a TaaS future in which robotic vehicles are relied on for urban transport also is undermined by teleworking. The impact of “lockdowns” on traffic congestion and air polution has been dramatic, and this may remove some of the motivation for TaaS.

Steve Auger: We are seeing an unprecedented attack on the economy, with 25_% unemployment rate and many people at home wondering what to do with themselves. It is natural to see displaced employees to start their own home-based businesses. We are seeing indications of a massive increase in eCommerce businesses via Shopify (SHOP) and other DIY web services. I expect that the overwhelming majority of these efforts will fail, either due to intense competition, lack of experience, or employees being called back to work. I also feel that the excitement over some remote communications products such as Zoom Video will die out once the pandemic is over. Not everyone wants to be on display during conferences and in most cases there is little value added to having video conferencing over audio.

Something that will last beyond the coronavirus, is the virtual contact center and unified communications. These technologies are lower cost and more efficient than legacy hardware-based alternatives.

Damon Verial: At the rate things are going, nothing will be temporary. Governments have attempted to flatten the curve by shutting things down, then panicking and opening back up. We are going to see an off/on oscillation of panic with a possible “new normal” being everyone permanently engaging in social distancing and donning PPEs. With the current policies, the idea of “temporary” will only be realized with a vaccine, which will not reasonably arrive until 2021, if not 2022. Even then, it would be the fastest vaccine man has ever invented. Don’t consider any negative corona-driven catalyst as temporary unless you want to be a member of the bull trap team.

App Economy Insights: I'm skeptical of the current boost in the food delivery business. A company like Grubhub (GRUB) could not be profitable even through a global pandemic that was forcing people to hunker down at home, despite online delivery being the only option for restaurants for weeks. I'm still struggling to understand the merit of a business with terrible unit economics.

Meanwhile, just in the last few days, companies like Twitter, Square (SQ), Mastercard (MA) and Shopify announced that they would make work from home permanent. The ramifications are devastating for commercial real estate and likely a boon for enterprise software facilitating online collaborative work.

I also believe Telehealth is here to stay and have been long Teladoc (TDOC) for years.

How do semiconductors look to you given the hit to the 'real' economy, the digital transformation story, and the possible re-ignition of trade tensions or reshoring trends?

Andres Cardenal, CFA: I think that there are many good semiconductor companies trading at reasonable valuations, but you have to be very selective in he sector right now. I would rather focus on the leaders with strong financial and strategic resources as opposed to going bargain-hunting in mediocre semiconductor companies.

Victor Dergunov: I am not too fond of semiconductors in this environment, as it is a cyclical business which is also very sensitive to various factors. Naturally, extremely high unemployment, poor consumer sentiment and spending are very negative for the industry. There is a lot of uncertainty about what demand will look like going forward. There is also the geopolitical factor to consider, as the semiconductor industry is essentially intertwined with China. Further geopolitical and trade tensions could create negative headwinds for the industry.

Elazar Advisors, LLC: There's been a pullforward in demand which sets up risk to the second half. You also have President Trump threatening trade restrictions which can chop off big chunks of revenues for some of these companies.

Joe Albano: Semiconductors have been an interesting group but the demand is truly there. April DRAM contract pricing was up 12%. That type of month-over-month move hasn't been seen since February of 2018. Server demand has ramped, GPU demand is steadily increasing, PC-related demand may level off but it was a huge pull-in as companies scrambled to outfit their workforce with laptops. Gamers stuck inside ramped their screen time and this has pulled levers for GPU purchases and thus graphics memory. Remember that's the same demographic with the disposable income from their tech careers, now remote. The move to SaaS and data center demand will continue - it was already going in that direction before and the pandemic has only increased the fire.

EnerTuition: Semiconductors have a good future in the sense that they will continue to grow as they have for the last several decades. But, trade tensions between the US and China are a significant dampener. Increasingly, more and more semiconductor production will move into China. Considering the trade realities, semiconductors, by and large, is an overheated segment.

Cestrian Capital Research: The US semiconductor sector is risky right now in the purest sense. Risk means, of course, unexpected movement to the upside or downside. We see the key risk as being the changing nature of the relationship between the US and China. The recent trade war is one thing but the real issue at stake, the reality behind the tariff and IP tussles, is the emerging challenge between China and the US for global hegemony. At the point where the US is voluntarily stepping back from global leadership - a move commenced by the Obama administration and accelerated by the Trump administration - China is stepping up its efforts to be the superpower of choice to partner nations around the world. We see the increasing nationalization of each country's technology supply chain as both a downside and upside opportunity for the US semiconductor sector. In the short term, we think the manifold fabless chip companies in the US are going to experience a hit to growth, as export restrictions on the US side and "buy local" restrictions on the China side impact their customers. But in the long term the return of merchant fabrication to the US - we saw the recent announcement of TSMC in this regard - can spur local manufacturing opportunities. In addition, an industry one standard deviation away from semis, that of comms hardware, may enjoy a resurgence in the US if Huawei is gradually blacklisted across the West.

Mark Hibben: I've always tended to be very selective about the semiconductor companies I invest in. I remain firmly committed to avoiding mainstream commodity semiconductors, which includes memory and storage, and commodity processors for PCs, especially x86 architecture. I continue to be very bullish on “new paradigm” companies such as Apple and Nvidia (NVDA) which don't just sell semiconductors to other OEMs but package their semiconductors into systems of integrated hardware and software. Nvidia's introduction of its new Ampere datacenter accelerator seems to be perfectly timed to take advantage of the growth of AI applications and cloud services. Both companies rely on Taiwan Semiconductor Manufacturing Company (TSM), another RT Portfolio component. TSMC will not be hurt by renewed trade friction, except in the case of Huawei.

Steve Auger: In my estimation, the hit to the real economy will drag on for a few years, and the semiconductor industry will suffer as a result. There are certain technology-led markets that are backed by deep pockets but are initiatives not based on consumer demand.These initiatives will be hard to justify and not see a return on investment in a prolonged recession. I am thinking of technologies such as IoT, Smart Cities, autonomous vehicles, and possibly 5G networks. These initiatives will get pushed back, postponed and in some cases disappear completely. Trade tensions will entirely depend on who wins the 2020 election. If Trump wins, then trade tensions will likely persist.Companies will be forced to move out of China, something that is already happening anyways because there are countries that offer lower cost of manufacture. If the democrats win then trade will be washed under the rug and we will go back to the way things were.

Damon Verial: China has been stockpiling semiconductors in advance of the US restrictions. Semiconductor companies are going to see a one-off gain in sales but should suffer henceforth. The Trump administration has just began more direct actions against this industry, having blocked a shipment of semiconductors to Huawei last week. In the future, we are going to see strong Chinese competitors rise (out of necessity) to steal market share from the US and Taiwanese semiconductor industry.

How do you feel about the sector as compared to the beginning of April?

Andres Cardenal, CFA: I was expecting technology to outperform, both from a fundamental perspective and in terms of market returns, this thesis has played out even better than I was expected. Going forward, if we manage to reopen the economy in a reasonably smooth way, there is a considerable chance that other more beaten down sectors could deliver bigger returns from currently depressed valuation levels over the next 3 months or so. On the other hand, when looking at the next 3 to 5 years I think that technology still offers very attractive opportunities for growth and outperformance.

Victor Dergunov: There were many compelling deals at the start of April, as many high quality tech stocks became deeply oversold in the March market meltdown. Now we see many companies trading close to or at all-time highs. In fact, we put out a buy list around the lows in March, and many technology names on our list have appreciated by 40%, 50%, or more since then. Right now, we are about neutral on the sector. I think it is overextended in the near-term, there will likely be a sizable correction into Q2 earnings, and it is very likely that many names will be available at lower prices during the summer.

Elazar Advisors, LLC: With the amount of Fed support these stocks have lift. Fundamentals in semis though are worrisome and with the economy at big negative numbers makes us want to rifle shot ideas or catch shorter term moves.

DM Martins Research: I feel better about it. In my view, the tech sector weathered the first few weeks of the crisis well and, arguably, above expectations. It looks like the market agrees, since the sector saw its value rise by nearly 20% since the end of March vs. about 14% for the S&P 500.

From Growth to Value: If you look at and invest in long-term trends as we do at Potential Multibaggers, nothing really changes in a few weeks or even months. It often takes years before the trends have fully materialized. I think investors have seen that as the so-called 'overvalued' stocks fell much less than those the traditional economy and several have already taken new highs.

Joe Albano: The V-shaped recovery has priced in quite a bit in expectations that everything goes according to plan. But, the long-term trend hasn't been touched. Americans are resilient and willing to go back to their same habits, and with the unemployment due to forced shutdowns waning, employment will move back as workers are antsy to open up shop. The only macro concern I have is the massive printing and the effects on inflation in the future. But will the market care - or can it care is the better question.

EnerTuition: 2020 is likely to be a solidly negative growth year for most semiconductor companies. 2021 is unlikely to be great for the semiconductor sector at large. We may not return to 2019 levels until 2022. The company valuations do not reflect this high probability scenario.

Cestrian Capital Research: Tech stock prices generally feel extended versus underlying company performance. We understand why this is - colossal federal stimulus plus the investor sentiment we discuss above - and we don't think the sector is about to correct hard any time soon. That doesn't mean we think it's safe to pile into the sector with large new long positions. The risk/reward isn't so compelling in our view. Our own approach at present is to look for tech stocks where the fundamentals are better than the stock price - there aren't hundreds of these, but there are some. Two in our coverage universe are Iridium which we mention above, and Maxar Technologies (MAXR). The market has both stocks tagged as much more risky than in fact they are today. IRDM might be a satellite company, but it isn't OneWeb or Intelsat, the two high profile bankruptcies with "satellite" on their websites - it is growing revenues, generating big cashflows and deleveraging; and MAXR might have been facing a balance sheet crisis last year but since it completed a large divisional sale, that crisis has abated - yet you can still buy the stock at the price it was when trouble was very much at the door. These are the kinds of opportunities we prefer as a home for new long positions right now.

Mark Hibben: I feel great about the new paradigm companies such as Apple and Nvidia, and the companies that support them, including TSM, ASML, and Teradyne (TER).

Steve Auger: I am surprised by how fast the software industry has bounced back. But I believe that we are in the eye of the storm and unable to assess the real market situation. Once November rolls around, we will be in a better position to determine whether we have averted a significant crisis or whether we are in a signification recession (or worse).

Damon Verial: Overvalued, even more so now. Few stocks in this sector are worth buying at these prices. If you want to buy, I’d look to the biotech sector. Biotech stocks might be breaking out, making them one of the rare smart bullish trades in this market. The MA(50) is showing a bullish crossover above the MA(200) in XBI (the biotech ETF). This is a volatile sector but still adheres to technical analysis most of the time.

App Economy Insights: There are many new synergies and partnerships happening among the best-of-breed tech companies that make me feel profoundly optimistic despite the current humanitarian crisis. For example, small merchants on Shopify can now turn to social commerce on Facebook, Instagram or Pinterest to reach their audience via branded shops or shoppable tags and pins. Etsy (ETSY) sellers managed to sell about $133 million worth of fabric face masks in the month of April. A product that did not even exist on the platform at the end of March! This shows the ingenuity and scalability of digital platforms and why businesses that are built as adaptable ecosystems are enabling entrepreneurs of all kinds to be successful.

Any tech names that you have been adding to through the last 6 weeks, whether earnings related or otherwise? What's the story?

Andres Cardenal, CFA: I started a position in Fastly (FSLY), which is still a relatively young company that provides CDN services on an edge cloud platform. The company is aggressively innovative and it has a lot of room for growth if management keeps executing well. I also added to my position in Sea Limited (SE) before earnings last week. Sea is the main player in online games, e-commerce, and digital payments in South East Asia. The long term opportunity is enormous and the stock is not too expensive at all considering its growth opportunities.

Victor Dergunov: We've been more focused on other sectors, primarily gold, silver, and mining. This segment accounted for a large portion of our portfolio throughout the quarter. We also realized very strong gains in energy, pharmaceuticals, and other segments. As far as tech goes, we've only held three tech companies in our portfolio throughout the quarter. Tesla, (TSLA) in which we realized a 70% gain in the quarter, Baidu (BIDU), and Alibaba (BABA), both up by around 15% thus far this quarter. We generally like tech, and we plan to build substantial exposure at lower prices.

Elazar Advisors, LLC: In a one-on-one interview we highlighted Activision Blizzard (ATVI) which is up nicely since we went to a Strong Buy Rating in late March. Call of Duty has its sights set on Fortnite type numbers. I think there's still big upside left.

DM Martins Research: I am not adding any, but I am reiterating my All-Equity SRG's overweight towards names that I believe will continue to be winners through and beyond the COVID-19 crisis: Adobe (ADBE) and Microsoft. I would not wait for share price weakness in any of these cases before jumping in.Adobe offers a rare combination of (1) market-leading, almost monopolistic digital services at scale (2) at high margins, which have become (3) predictable as nearly 90% of revenues are now subscription-based. Microsoft has a compelling, prosperous recurring-revenue model, and I think it has quite a bit of a runway ahead in the business transformation process towards SaaS and cloud.

Joe Albano: I did most of my buying in early-to-mid-March and it was in Western Digital (WDC) and Broadcom (AVGO). With prices at such lows, even with WDC cutting the dividend, the capital appreciation is still making it a winner. Other picks I had were Nvidia and Micron (MU).

EnerTuition: Amazon, in spite of its rich valuations, has been a new addition at Beyond The Hype in March and has been a solid success. The Company uniquely benefits from the move to online - both in retail segment as well as the AWS business.

Cestrian Capital Research: Iridium and Maxar, as we discuss above. In addition, ManTech International (MANT), an owner-operated software and services company that serves various military, space and security arms of the federal government. MANT is not a well known company despite its c.$3bn EV; it trades at low multiples of revenue, EBITDA and cashflow and yet is growing all three quickly. It's a relaxing stock to own long term, is volatile so can be traded short term, and in addition the company is positioned well to be acquired should the founder decide to retire - there are multiple viable strategic buyers and plenty of private equity suitors to boot. The company itself added Carlyle Group (CG) DNA to its board of late which we think can help both with operational improvement and also with that potential sale.

Mark Hibben: I've been holding off buying more, since I'm still assuming a major correction.

Damon Verial: I only went long Spotify (SPOT) and TDOC. The former worked out, while the latter is killing me. Mostly, I’ve been shorting this sector.

App Economy Insights: Twilio (TWLO) is currently the Stock Idea of the month on the App Economy Portfolio service. I revealed this pick to subscribers on May 1st ahead of earnings, along with a live trade alert (I added the position to the real-money portfolio for the first time). The company had a blowout quarter and is up 73% for members in the past three weeks. Among other live trade alerts shared with members in the past few weeks, I doubled my Alteryx (AYX) position (up 61% since then) and added to my Square position (up +32%).

If you participated last time, any updates on the companies you liked then?

Andres Cardenal, CFA: In the previous roundtable I highlighted how Twilio could potentially benefit from increased demand for digitalization in all kinds of communications. Since then the company delivered a spectacular earnings report and the stock price has surged as a response. I would rather be patient as opposed to buying at these prices, but Twilio is a great name to consider buying on any pullbacks down the road.

Elazar Advisors, LLC: Tesla (TSLA), was our top pick in the last tech roundtable we did Dec 23rd and was priced in the low $400s then. It went ballistic since then. I did back off since because of some Freemont production issues and China production and demand issues.

From Growth to Value: I said then that I had added to my Square position at $53, $45 and $33 and to my The Trade Desk position at $165 and $140. Those were really good buys with hindsight, as Square is at $79.25 now and The Trade Desk is at $294.10. But for investors that have missed this rally and like the companies, I wouldn't be afraid to scale in at these prices. If the stocks go down, you can average down, if the stock goes up, you're happy that you didn't wait to start a position and you enjoy your gains. So you always win! That's the beauty of long-term investing in top-notch companies that can grow fast for a very long time.

EnerTuition: Beyond The Hype continues to be a strong advocate of Advanced Micro Devices and SolarEdge (SEDG) through COVID.

Cestrian Capital Research: We picked Lockheed Martin (LMT), Microsoft and The Trade Desk as our stocks to buy on the way out of the crisis. They have all performed very well, helped no doubt by the generally very rapid recovery of the market at large. We think they are all likely to be sound long-term (say 3 years+) investments even at their current extended prices; as short-term long trades they offer less appeal right now, and as short-term short trades, well, you would be betting against the best and we aren't sure that's so wise.

Mark Hibben: No. I'm still long AAPL, ASML, MSFT, NVDA, TER, TSM.


Thanks to our panel, a lot to think about in the tech space, and we hope you found this useful. Check out their work at the links at the beginning of the article.

We'll continue this series next week. We recently received a request for closed-end funds that we will follow up on, and if there's any topic you'd like to see covered, please let us know below.

See also Clearway Energy Q2 Preview: It's All About The Dividend on

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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