Markets

Tech's Twists

By SA Marketplace :

2018 seems to be ending on a bad note in the markets. December is setting the wrong kind of records, and Q4 has been a bumpy one in general. This is what happens in the stock market sometimes, but it's been easy to forget over the decade-long bull market.

We're using the end of the year as a chance to lift our heads, survey the market, and see what might be coming ahead. To do so, we're inviting our Marketplace authors to do a series of roundtables. 2018 was another steady growth year for the platform, and we have a lot of great voices on the Marketplace, so we wanted to share their perspective with you.

Our Year End Marketplace Roundtable series will run through the first full market week in January. We'll feature ten different roundtable discussions, with expert panels chiming in on Tech, Energy, Dividends, Other Income strategies, Gold, Value Investing, Small-Caps, Alternative investing strategies, Biotech, and the Macro outlook.

This roundtable looks at tech, which led the market higher and is doing so again lower, with the Nasdaq hitting a bear market in the last full week of the year. What's going on? We asked our panel to make sense of the situation:

Seeking Alpha: It feels like the Nasdaq had a bad year given the recent months, but as of December 11th the index is still in the green. How would you summarize 2018 for Tech? (Note: Question obviously asked on December 11th - prices have changed!)

Tom Lloyd: Deviation from the mean describes almost perfectly what is happening to the Tech Stocks. Just take a look at the monthly charts for Apple ( AAPL ) and Netflix ( NFLX ) and you can see how irrationally the market, the ETFs and the robot trading had moved price to unsustainable highs. The efficient market eventually kicks in and price returns to the mean. I am looking for bargains where the pullback is overdone and in 3 to 5 years the stocks will double. I am just waiting for the bottoms to be confirmed so I can put them back in my model portfolio once again.

Elazar Advisors, LLC: Tech was doing great in 2017 and the first half of 2018 but hit a brick wall in the third quarter. We told subscribers to be hedged through just about all of October, November and December because we saw that earnings growth was peaking. Earnings drive stock prices. Q3 ended up being even worse than we expected. Q4 should be no different. Be careful.

Damon Verial: In the short term, it certainly does feel like the NASDAQ hasn't been doing well. But as stated, tech stocks are actually up as a whole. The fear right now is a product of the recency illusion: That this time is different. In fact, every bull market has corrections, and these corrections are healthy for their ability to prevent real bubbles, such as that of 2000. As the economic environment is still one of growth, I am confident that this current pullback is a mere correction and not a repeat of 2000.

Michael Wiggins De Oliveira: It has been a year of two halves. In the first half of 2018, tech stocks were fashionably in favor. It became a brainless transaction for many market participants. But towards the back end of 2018, there has been a slightly more subdued market. Now, here is the thing, while many investors are panicking, and while the market has been swift in its sell-off, it has not been, overall, all that bad. There are still plenty of names, such as Amazon ( AMZN ) and Netflix, which still carry egregious valuations. Yes, there are some pockets which have been grounded slightly, like Nvidia ( NVDA ), but even then, these slightly cheaper opportunities are not yet trading in the bargain basement. Overall, the market is still very expensive - contrary to most investors' opinion.

The Freedonia Cooperative: Regardless of green or red, 2018 is going to go down as a defining year for tech in terms of privacy and security. Facebook ( FB ) bore the brunt of it this year and I think they'll continue to do so; but Google ( GOOG ) and Apple may find themselves under fire with recent reports on apps tracking locations. Tech is still seen as a major good in American life, but tides are changing where the size, scope, and microeconomics that these companies support are going to come into questions of fear from users. Companies are going to have to both invest in privacy in 2019 and assure users of it; bringing spikes in investments here and/or changes in business strategy that relies heavily on targeted advertisement.

Joe Albano: Tech has seen a myriad of factors play into its ups and downs with much of it balancing out to a neutral sentiment albeit barely green year overall. Social media stocks such as Facebook, Google, and Twitter ( TWTR ) are feeling the effects of incidents and allegations brought to light throughout the year leaving them in a flat-to-down return for the year. On the other hand, software has seen a pretty stable year as tariffs on physical items haven't affected these companies nearly as directly - companies like CyberArk ( CYBR ), FireEye ( FEYE ), and Microsoft ( MSFT ). Hardware has seen the best of times and the worst of times this year. Many 52-week highs were made just a few months ago including Nvidia and Apple, both of which dealing with retail-sided pressure. Tech performance overall has fragmented forcing investors to find where the pockets of strength are. It's not as easy as filling the shopping cart with everything from aisle 4, and so this is where the advantage of knowing the industry to know what will perform well comes into play.

App Economy Insights: I don't look at the market on a calendar year basis and would rather focus on where we are in the credit cycle. While 2018 might look almost flat, there is a much bigger story here. On December 20th, for the first time since 2008, the NASDAQ entered bear market territory, falling more than 20% from its record reached at the end of August. This bear market was much needed after a 10-year bull run. I welcome it as a great time for opportunities to put new money to work. Investors who maintain a diversified portfolio and stay invested so they experience the subsequent recovery should not be harmed. Remaining focused on the long term is an important thing to do when in the middle of a bear market.

B&B Market: The majority of 2018 has been a strong year for technology companies, however hectic is a great word to summarize the year. The NASDAQ had returned 15% as of the beginning of October but has lost 17% in the last 2 months, making the YTD return about -5% as of this writing. This year, the markets were plagued by privacy scandals, government attacks, and a trade war as some notable events. The markets became extremely volatile near the end of the year and I foresee the beginning of 2019 to act similarly.

Matt Bohlsen: 2018 for tech has been a tale of two halves - H1 2018 was good, and H2 2018 has been bad. In particular, late 2018 has seen risk-off sentiment due to the US-China trade war and rising US rates. Fundamentals have not really changed, except for greater regulator scrutiny on the way tech companies use customers' data and some slowdown in the tech giants' growth rates which was to be expected.

Billy Duberstein: Well... it ain't green anymore as of 12/20 as I write this! I think the word I'd use to describe 2018 is "Whipsaw." Tech is a mixture of high-growth, high-multiple software companies and cyclical chip/hardware stocks. In the wake of the 2017 tax cuts, U.S. growth accelerated, leading to blowout results and fueling optimism. Then, Trump started the trade war with China in the Spring, which has, at least rhetorically, escalated since that time. In addition, the October Bloomberg Businessweek article about Chinese hacking of Super Micro Computer motherboards called into question the security of much of the tech supply chain. Then, just as soon as we get a trade "truce" in early December, the Canadians arrest the CFO of Huawei for violating Iran sanctions. These tensions fueled fears that a wrench would be thrown into global trade generally and the tech supply chain specifically. Add in the Fed going somewhat on autopilot with rate hikes, and all of that growth optimism has reversed (killing cyclicals) while investors began to use higher discount rate assumptions (killing high P/E growth stocks at the same time). So, there was a huge whipsaw in sentiment from extremely positive in 1H to extremely negative in the matter of a few months. "Whipsaw!" Quite a change from the low-volatility environment we were in last year.

Mark Hibben: It was a good year up until the beginning of October. Then a number of factors converged that caused the market to sell off many tech companies. There was weak earnings guidance from companies such as Apple and Nvidia. There was fear that the trade war would hurt, both directly and indirectly, companies that do business in China or which have production in China. Bloomberg's The Big Hack, which alleged that the Chinese had infiltrated the data centers of companies like Amazon through modified server hardware, seemed to heighten the paranoia concerning China. And there were numerous analyst warnings about a "chip slowdown" which the media applied indiscriminately to all semiconductor companies. The combined effect has been to drive many companies negative on the year. However, many of these companies represent buying opportunities, and I plan on making purchases in 2019.

SA: The air came out of FAANG a little in the second half of the year especially, though again only Facebook is down on a total return basis. Has the story changed for these market leaders?

Tom Lloyd: No, the story has not changed and the only thing that has changed is price and how cheap you can buy them. I keep thinking about how Warren Buffett was smart enough to buy Apple at the very bottom. Now we will have that opportunity with all of the FAANG stocks. I don't see one loser, but obviously some stocks are going to stay bottoming longer than others.

Elazar Advisors, LLC: They seemed to all slow in Q3 for different reasons. I think it's safe to stay away as long as their growth rates continue to contract. High multiple stocks with contracting growth rates is not a pretty formula. Usually it takes at least 4 quarters for a company to work out of a slowing trend. But you can't just buy in four quarters. You'd first need some inkling that something's improving.

Damon Verial: FAANG is a coin termed by Jim Cramer, who has been shown statistically to be wrong more often than right. As an analyst with mainstream appeal, Jim Cramer gains more from speaking about popular stocks than stocks that are likely to outperform. I don't choose my plays by the popularity of the stock but by the probability that the stock will move in a certain direction.

Michael Wiggins De Oliveira: FAANGs make for a catchy name. However, that's all it is, nothing more than a journalistic sounding name. Because, for instance, even within the FAANGs themselves, there are huge valuation discrepancies. For example, no rational and experienced investor should make the argument that Apple and Amazon should be similarly valued. Yet currently we find them trading with similar market caps. More specifically, we know that Amazon's Q4 2018 results are guided to post revenue growth of between 10%-20%. While presently, investors are pricing in substantially higher growth. On the other hand, Apple is growing its top line around 15%, yet investors are not willing to pay more than 15 times earnings. And remember, Apple has a rock solid balance sheet and an accelerated share repurchase program which has more than $50 billion allocated for repurchases over the near to medium-term. Amazon, on the other hand, carries a weak balance sheet with debt and capital leases and yet investors are willing to pay more than 90 times its earnings. In summary, the story has not changed as much as investors believe. Amazon was in favor at the start of 2018 and it still is. Apple, Facebook and Alphabet were cheap earlier in the year and they still are. The only question mark could be around Netflix. While it appears that its bubble may have started to deflate, it's too soon to call it one way or another. For now, Netflix is still very much in favor with investors.

The Freedonia Cooperative: Facebook is the first to feel the burn of this, but I think others will soon. Social Media is so reliant on data-based microtargeting because it has few other inherent value propositions in terms of revenue; but Google may have some of this coming, as well as Amazon, who took the lead in 2018 in product search.

Joe Albano: All for one and one for all is the best way to sum it up. Facebook's issues aren't affecting Netflix, but Netflix is down almost 40% from its July highs while its business looks pretty decent on a subscriber momentum basis. Amazon has had its political struggles, down 25% since its highs. Each has had their unique struggles but being the largest companies traded, it's easy to deflate these stock prices first especially as high valuation leaders (exceptions of course). They all have their own problems, but they all seem to affect each other - the answer is they each represent a leading and relevant facet of our society. Therefore, one weakened pillar supposes the idea the other pillars are not far behind.

App Economy Insights: To a certain extent, the air that came out of FAANG is mean reversion working its magic. Investors should not reasonably expect a +20% year time and time again. Google, Apple, Amazon have built platforms and ecosystems that developers, publishers and consumers will probably rely on for the decades to come. Government regulation has been the theme in 2018 for social media giants like Google and Facebook. More of these growing pains should be expected in the coming years. These are necessary steps in their outstanding growth stories. It might create a lower ceiling than expected on their overall potential, but it will create an even stronger moat around their leading positions.

David Pinsen: I think the business story is still the tension between their moats as oligopolies and the threat (however small in the near term) of antitrust or other regulatory action against them. Amazon increasing its minimum wage in the U.S. to $15 per hour (nearly double the current federal minimum wage) can be seen as an attempt to ward this off.

Matt Bohlsen: Facebook has seen user growth slow down or stall especially in developed markets such as the US and Europe; however, developing markets such as Asia are still growing well. Amazon has seen their revenue growth rate slow. Apple is seeing a slowdown in global smartphone sales. Netflix sales growth is still strong and doing well from a smaller base than those mentioned above. Alphabet growth has slowed. What this all tells us is that the % growth of the very large FAANG stocks has slowed, with the smaller Netflix as the exception. It is like China GDP - the growth rate % can slow, but due to the massive size, the raw number growth is still impressive. Investors will need to expect a bit lower (but still positive) rates of return on big tech going forward. Valuations have been adjusting in H2 2018, and are now closer to fair value, and worth starting to accumulate again.

Billy Duberstein: Stories are always changing with FAANG, which is why these huge companies are so interesting, but the most significant story change is indeed Facebook. The degree to which the story has changed is unclear, but there are now some legitimate questions around the business model. Facebook is still very profitable and growing, but there is a big concern around how much it will have to spend to police its platform and if the margins of the company are now structurally lower, or if the margin contraction next year will be a one-off. There is also some concern around data privacy. I'm not sure if the company's ads will be quite as effective if users withhold meaningful data from the company (I suspect they will still be pretty effective though). But I don't think there will be much defection from the platforms. Thank God the company also bought Instagram, which most users probably don't even know is owned by the same company. Instagram really seems to be doing well and beating Snapchat at its own game. There's also some personality drama around Zuckerberg and Sandberg, but I don't think the average user or advertiser cares that much about that stuff. I lean towards Facebook turning out okay in the long run, but my confidence in Facebook is admittedly now the lowest of the FAANGs. Since the others have now all sold off as well this month (Facebook fell first), I'd prefer the other FAANGs to Facebook, though I didn't necessarily think that some months ago when the others were relatively more expensive. That being said, these companies all remain incredible businesses and I think all are probably good long-term buys after the recent swoon, Facebook being the riskiest.

Mark Hibben: FAANG is kind of a convenience category and these companies don't always have a much in common. I've never been a fan of the ad supported social media companies such as Facebook and Google. I consider Netflix still overvalued, although it's not as bad as it was. Apple and Amazon I consider to be interesting "new paradigm" semiconductor companies. New paradigm companies design their own processors rather than buy from commodity vendors such as Intel. Apple has been doing this for years for its iOS devices, and Amazon recently joined the ranks of the new paradigm when it announced that it was deploying custom designed ARM processors in its data centers. Although the recent downturn has certainly affected their valuations, I don't think it's changed my fundamental takes on these companies. The social media companies are mainly about merchandising personal information. This is becoming more of an issue, and I don't think it's an issue that can be solved without fairly dramatic change to their business models. I avoid social media companies, but consider the new paradigm to be the wave of the future in semiconductors.

Juan Carlos Zuleta: I beg to differ - I am instead of the opinion that the second half of the year and in particular the last three months of 2018 was bad for FAANG because all of reasons that triggered the fall of their stocks occurred beginning July. Here I am talking about Facebook's scandal over data privacy; Amazon's Q3 earnings report; Apple's legal battle with Qualcomm ( QCOM ); Netflix's drop in subscriber growth due to competition; and Google's European fine over security flaws.

SA: Speaking of Facebook, what do you see for the company in 2019 and beyond?

Hans Hauge: Facebook has become a tech dinosaur. I think what we're seeing now is their slow decline. Just talk to any kid on the street and ask them what they think of Facebook. They'll tell you it's just not cool anymore. Besides that, people who are interested in privacy jumped ship long ago, and the rest of the population is only hanging around because, well there's nowhere better to go yet. Does that mean Facebook is a bad investment? I'm not saying that, they could continue to make money, good money even; despite being long in the tooth.

Tom Lloyd: Facebook is probably dead money for 2019, but once it moves off the bottom, I think it will zoom back to making new highs. Unfortunately, it has enormous challenges, but I think Zuckerberg has shown he knows how to handle challenges. Facebook is in dry dock for repairs to its leaky boat, but be ready for the launch and a less leaky boat making the trip around the world and taking Facebook back to new highs and beyond. Facebook becomes even more important in a recession as users spend more time on it. Ad budgets will be cut during a recession, but Facebook may take more market share, rather than less. I think they will beat Google.

Elazar Advisors, LLC: I think this is getting worse. The company guided now two quarters in a row specifically citing a slowdown in revenue growth. Based on what Mark Zuckerberg has said publicly that 2019 will be a tough year I think this trend can continue to worsen. Facebook has a problem. They are trying to muscle their core customer's usage habits from passive consumption back to social engagement. Typically they've done a good job chasing consumer habits. Now they are trying to change them? This is not a safe stock. We are below the Street for earnings.

Damon Verial: Facebook is safe. The company has a monopoly on social media advertising and arguably the best customer metrics in the industry. As a former digital marketer, I've used practically every digital advertisement vendor on the internet, and Facebook stands out as the best in terms of specific targeting. While Google advertisements get you more exposure, Facebook offers marketers the ability to target virtually any specific group intersection (e.g., newly wed women in their 20s who are interested in cosmetics). Some analysts consider Google and Facebook competitors, but the truth is both of these companies are monopolies in their given niche and can operate alongside each other, provided Google Plus never gets big or Facebook never creates a search engine. As the marketing becomes increasingly digital, stealing revenue from television, radio, and the like, both Facebook and Google should continue to grow their revenue and earnings.

Michael Wiggins De Oliveira: Facebook is my best idea among the tech stocks. There is no scenario where the stock is not undervalued. Pick any metric. Most investors could not seriously expect Facebook to continue to grow in the medium term at plus 40% year-over-year as it has been. Those days are gone. But what's left?

Well, it's my strong contention that Facebook can grow above 20% year-over-year over the next 2-3 years. Having said that, most investors are fearful (understandably) of Facebook's elevated operational expenses, which are going to hit between 40%-50% in 2019 - worse case assumption Facebook's FY 2019 operating expenses will reach $47 billion. In other words, Facebook's operating income will hover around $27 billion. Is that so bad? For a company priced at $420 billion market cap? This implies that Facebook is being priced at roughly 15 times operating income. And we should remember, that Facebook's balance sheet carries around $40 billion of cash and equivalents (and no debt). Moreover, two further aspects need to be brought to the front of the thesis. Facebook is an extremely asset-light business, where 30% of its revenue ends up as free cash flow. In essence, Facebook is not a capital intensive business, where a large portion of its earnings need to be reinvested, no. Not at all. And finally, investors should recognise that Facebook has increased its allocation for share repurchases by $9 billion to $24 billion. If this is not a sign of management's confidence in the business, I don't know what is.

The Freedonia Cooperative: It'll rebound and have enough capital to reinvent itself (I believe they still have no debt on their books) - but it'll need to find a way to repair its image with the young people who are active on mobile but also more conscious of what's happening in the tech arena.

Joe Albano: Facebook has been mired in PR report after PR report - none of which have been positive. The media is doing much the same they do in politics - if they don't like you, it doesn't matter what is happening, you're wrong. Also much like the media, when they move onto their next target, the last target falls to the wayside. 2019 could be that transition to the next target while Facebook works toward its goal of moving toward Stories and Messenger (also WhatsApp) revenue. If both happen, then Facebook will be on the map again for stock price appreciation.

App Economy Insights: The story that has changed the most during 2018 has certainly been Facebook amid scandals of election meddling, private information usage, and management transparency. There will be consequences that will soon unravel: regulations will come with additional costs for the company to keep its platforms in check, some of the revenue growth could suffer from tougher rules around private information, and the hidden costs of a much-needed re-shuffle of the leadership team given the way they have handled PR.

For 2019 and beyond, Facebook remains an outstanding business that is bigger than the sum of its parts. They are learning the hard way but will come out much stronger on the other side, with new rules and standards that will be very hard to replicate for any newcomer. Remember: even Google wasn't able to build a sustainable social media platform.

B&B Market: Facebook is a stock that has been abused this year. The company has been involved in multiple privacy scandals, on its main platform and on others such as WhatsApp. However, the stock is currently trading at very attractive multiples compared to historical norms. While I am not personally a user of Facebook, I see the data showing that it is a booming business. Users are reaching all-time highs, ad-revenue is strong, and the company is actively diversifying its business line into other segments such as VR and competitors like the Instagram acquisition. The market has beaten the stock down in 2018, I see this reversing in the future. Valuation wise, this is a strong opportunity to buy in my opinion.

David Pinsen: Of the FAANGs, Facebook would be the most vulnerable to antitrust action, because its core platform has been in decline, and it has depended on acquisitions (e.g. Instagram, WhatsApp) to attract users. Whether there will be any antitrust action against it in 2019, I don't know, but the company faces other challenges regardless, such as the lawsuits by video advertisers.

Matt Bohlsen: Facebook platform overall user growth will slow, but monetisation across their various platforms should improve. Further data scrutiny and some fines can be expected. Overall, 2019 should see a solid but not spectacular year for Facebook with the stock price recovering to back above USD 150 and probably closer to USD 175, assuming no significant global slowdown and poor sentiment.

Billy Duberstein: 2019 should be flat earnings on higher spending. The big question is if the company can moderate spending and continue to raise ad prices in 2020 and beyond to rejuvenate operating leverage. It will be interesting to see how long the terrible headlines last for Facebook - there seems to be a new one each week and I don't see that changing in the near-term unfortunately. How patient will investors be?

Mark Hibben: Facebook usage appears to be on the decline, according to a recent Pew survey . I'm not convinced that more extensive privacy settings will be enough to solve Facebook's fundamental problems of fake news and foreign exploitation. This is a problem not unique to Facebook, of course, but is general in social media.

Jeffrey Himelson: I see regulatory measures disrupting its business model.

SA: What's the biggest story in tech this year as far as you are concerned?

Tom Lloyd: Tesla ( TSLA ) seems to be Teflon coated for the time being. By all accounts they should have gone bankrupt, but the stock keeps climbing to that $420 target of Elon Musk, just to prove the regulators were wrong and Elon was right. It is too risky and too overvalued for our model portfolio. Computer assisted driving is taking over all cars and Tesla is at the cutting edge here and in the electric car. This is the Tech story that will affect everyone that drives a car in the next 5 years.

Elazar Advisors, LLC: The trade war was just news until it hit earnings. Earnings are what drives stock prices and corporate CEOs all blinked slowing purchasing decisions in Q3 waiting for trade war resolution. Until that is resolved, I see tech continuing to slow. What bigger story is there?

Damon Verial: On the topic of Facebook, note that the company gains its data essentially for free, from its users' (not paying customers) devices. Facebook has come preinstalled on many phone brands for some time now, but a more recent development will allow the company to acquire even more detailed data. Before 2019, a new Android update (which will be automatic, without a permission prompt) will force users to allow the OS to continually update Facebook with your phone information, including SMS and call logs. Of course, Google has a hand in this because Android is its OS. The question is whether Google will be collecting data for their own use as well.

The Freedonia Cooperative: Facebook and Cambridge Analytics and the fallout from that being seen elsewhere.

Joe Albano: The global economic story - it's affecting everything including tech. But let's not forget the front half of this year was quite good. There's a lot of uncertainty in the back half of this year and it's causing quick decisions by management in all companies to change investment directions and move to safer places. 'Growth' and 'safe' generally don't go together. Growth requires investment and return on investment and that is being stagnated right now with the state of global affairs. The hope is this doesn't trigger other events and economic faults to appear or the dominoes to fall but the preparation at the end of this year is to ready for it if it does.

App Economy Insights: Coming from the video game industry, the biggest story of 2018 for me has been Fortnite from Epic Games (40% owned by Tencent ( TCEHY )). Following the success of Fortnite (more than 200 million registered users and $2 billion revenue in 2018), a new expectation of the way we play video games has emerged: cross-platform play, seamlessly syncing people playing on smartphones, PCs and consoles. Not only did Epic Games reveal a new store that will compete with STEAM and Google by disrupting the pricing model on PC and Android (challenging the status quo with a 12% distributor margin), they also announced they will launch free services designed to help developers implement cross-platform play into their games. This is more important than you might think: this paves the way for competitive games to become platform-agnostic and could make existing console hardware mostly irrelevant.

B&B Market: Funny enough, the biggest story had to have been the Chinese IP scandal that was just reported in mid-December. Reportedly, the Chinese government has been employing hackers to steal IP from American companies, codenamed "Operation Cloudhopper". This story encapsulates all the negative themes that we have seen in the tech markets throughout this year. There is malpractice from China, a break of privacy and law, and there is IP theft which has been a main driver of the US-China tensions. IBM and HP are among the affected and these reports will most likely be a direct impact on the outcome of the recent 90-day cease fire between the 2 nations. It is sure to be interesting to see how the current administration handles this report.

David Pinsen: Probably the precipitous declines in the esteems of Facebook's CEO and COO. Sheryl Sandberg was mooted as Hillary Clinton's likely Treasury Secretary had Mrs. Clinton won the election in 2016, and Mark Zuckerberg appeared to be testing the waters for a presidential run of his own before this year's Facebook scandals.

Matt Bohlsen: The November launch by Alphabet of autonomous vehicles with no human driver in Phoenix, Arizona. The era of the robo-taxi has arrived. This can be a multi-billion dollar industry, and Alphabet's Waymo is leading the way. It should also help boost electric vehicle sales as EV robo-taxi fleets are purchased. I expect it won't be all smooth sailing, but disruptive change is never that way.

Billy Duberstein: I think the China trade war and concerns of hacking/cybersecurity, because so much of the global tech supply chain moves through China, and the issue has really escalated to the forefront of both the business and geopolitical news. How the trade talks play out will be really consequential for tech and could lead to a binary outcome for the Nasdaq next year. Will China and the U.S. find ways to collaborate and prosper together, or will each nation re-trench and engage in an adversarial tech arms race? I would think cooler heads would prevail and that each side would act in its best interest. However, nothing's off the table for this administration or for China, for that matter, which has not been a good actor. On the positive/cool innovation front, you will begin to see the first 5G phones and deployments next year - though it will still be really early days for that. And, of course, the continuing trends of cloud computing/AI/IoT and more automation in every aspect of life both for consumers and enterprises, which is the most important story of this decade and era.

Mark Hibben: I actually thought the AWS announcement of the custom ARM chip deployment was the most significant news of 2018. I've been expecting ARM penetration of the datacenter market for some time, but it came from an unexpected source. The hyperscale datacenter providers such as Google, Microsoft, AWS, all have the resources to design their own chips, and I expect more will do so. The handwriting is on the wall for commodity chip makers such as Intel ( INTC ) and AMD ( AMD ).

Juan Carlos Zuleta: Apart from Facebook's shares fall over data privacy since July, the biggest story in tech this year was the lawsuit battle between Apple and Qualcomm that brought about a victory for Qualcomm after courts in China and Germany ordered to ban imports, sales and offers for sale of various Apple iPhone models in China.

Jeffrey Himelson: Privacy concerns.

SA: Semiconductors genuinely had a tough year - are we in the middle of a downturn, or is something else going on? How important is this for tech investors to follow?

Hans Hauge: The story behind semiconductors is simple, people underestimated the impact of crypto. The cryptocurrency market moves in waves, and from what we've seen the last few years, the waves are getting larger over time. Near the end of 2017, Bitcoin mining machines and graphics cards were selling on the secondary markets for multiples of their retail price. As the market crashed, all those cards flooded the market, and we saw the classic bullwhip effect. Suddenly there's inventory piling up, and it will take some time for this to rectify itself. Semiconductors are a great long term play, and if you can get in while the price is discounted, all the better.

Tom Lloyd: This is just the usual cyclical downturn. It should be no surprise to anyone. Just recognize the truth and don't ride the cycle to the bottom. Micron has to prove this cycle is different. Otherwise investors need to wait for the bottom and the next upcycle.

Elazar Advisors, LLC: Semis especially go in cycles. Q3 was a clear drop making Q2 the peak. That would mean that year-over-year growth probably continues down through Q2'19 at least. The problem is this upcycle was a little longer than the typical two years so the risk is the downcycle takes a little longer to work out. This is also not yet a safe group and certainly not before the trade war is resolved. We've been cautious on semis for a few quarters.

Damon Verial: Semiconductor stock strength is contingent on tech stock strength, which itself is contingent on the general economy. I believe semiconductors will bounce back shortly.

Joe Albano: It's not a downturn like the market thinks of semi downturns. The last downturn was because end demand for an entire category basically came to a halt (PC DRAM) while supply was still ramping. This time it's not a matter of end demand weakening materially and not a matter of drunken supply. Instead, it's an inter-vendor demand issue. After a huge rise in demand, now a few levers have fallen off (crypto mining for one), and there's excess inventory at the OEM level. That inventory is being worked through to the end user, but it softens demand back to the manufacturer. Until this inventory is worked through, there isn't a need for more bits being shipped. However, once inventory is cleared out, the end demand that was still there - "hidden" from the manufacturers - will cause a need to put product in the channel. At that point, after a year of capex cuts (controlled supply), there will be an imbalance the other way and demand will overtake supply. Look for this to happen in Q4 2019, if not slightly earlier.

Matt Bohlsen: I think we are most likely to have a short term (1 year) lull as global smartphone sales have currently stalled. As we move past this and with the arrival of (and increase of) 5G, robots, autonomous vehicles, artificial intelligence, IoTs, cloud data storage expansion; that will lead to the next upcycle in semiconductors probably not felt until 2020. Many consumers are waiting to upgrade to 5G smartphones which we will start to see in 2019. This will increase further in 2020. 5G will be up to 100 x faster than 4G, and will soon have a huge impact.

Billy Duberstein: Very important, and even experts disagree on this question. In my opinion, I think the current slowdown is a pause, or "air pocket" amid a powerful secular trend, and I'm sticking to my guns on this. That being said, if the Fed and/or administration makes a policy error on China or anything else and we get a global recession or depression, I'll be wrong, or it will take longer to play out. I happen to think the semi trends are very powerful ("smart everything"), which are battling near-term cyclical concerns - and by the way, these are still just concerns. The economy is still growing. We unfortunately had crypto-mania and tax cuts, leading to a boom, and now trade war and Fed hikes have slammed the brakes. This is not ideal if you are a chip company that's trying to match supply with demand on a near-term basis. I think the long-term picture is still pretty positive for most of these companies.

Mark Hibben: I think the market has gotten overly frightened about semis. The news media and the market don't make the distinction between old paradigm, commoditized semiconductor companies such as Intel and Micron, and new paradigm semiconductor companies such as Apple, Nvidia, and Amazon. Memory and storage probably is headed into a cyclical decline, but that doesn't mean that the new paradigm companies will follow. However, the market is acting like semis are a monolithic block. I believe that when the new paradigm companies report December quarter results, they'll surprise to the upside.

SA: What are you preparing for in 2019? What big themes matter?

Tom Lloyd: We are preparing for slowing growth and lower earnings. The Fed, tariffs, gridlock in Congress, impeachment in the White House, combine for a disruptive and toxic brew for the stock market and the economy. We expect those who are Indexing will lose money in 2019 and 2020. So the Indexers need to become stock pickers again and make sure they are only in stocks that are beating the Index. Portfolio managers will rotate to lower beta stocks which will fall less than the market. The Dow stocks seem more attractive than the Nasdaq. We have a daily report on the Dow Index Stocks and only 11 have Sell Signals according to our computer system. I like the Healthcare, Technology and Communications Services ETFs for 2019.

Elazar Advisors, LLC: I think 2019 is going to be super volatile, more than we see today. Everybody's going to need to change how they think about stocks, trading and fundamentals. We've added a market overlay component to our service in the last few months and it helped our subscribers hedge out the last three months. Why take risk when the market is showing you it's heading down. Volatile markets are bear markets. It looks like we're early on in that. That said, I want to respect the market up or down but we cannot be complacent hoping stocks only go up. Fundamentals slowing in combination with downtrending volatile markets is something to respect and tread lightly.

Damon Verial: I believe that we will see the end of our current bull market and the beginning of a bear market in 2019. This is not tech-specific but will affect the entire market as a whole. The economic variables are peaking and growth is slowing. Once we see growth sloping down, which I predict we will see somewhere around the middle of 2019, the market should be around its peak and begin to fall. This will be a normal, "natural" bear market and is something all investors - tech investors included - should be preparing for as we enter 2019.

The Freedonia Cooperative: Crypto (that's my area of expertise here). 2018 was a tough year for it, with the storyline being something akin to the bubble burst. But what happens next? I'm hoping 2019, or perhaps 2020, will be where the real projects separate themselves and show the world what this innovative technology can do to industries. I think we'll see heavily invested-in companies be able to do this first (Ripple, Stellar, Vechain), but the big elephant is going to Bitcoin at least through 2019. So depending on how the world economy adjusts to either let Bitcoin in or lock it out will have a huge effect on the crypto market at large.

Joe Albano: Recovery. When does large growth return? That's the question.

App Economy Insights: As someone based in the San Francisco Bay Area who covers the App Economy, 2019 couldn't look more exciting. It looks like it will be the year of the "decacorns" going public such as Uber, Airbnb, Lyft, possibly Pinterest among others. I look forward to following closely the trends that make the rise of the App Economy and the businesses resulting from it so fascinating, both from a consumer and an investor standpoint: the gig economy, experience economy, games as a service, online dating, transportation and more.

B&B Market: Given that I focus on China and Chinese ADRs, 2018 had a lot of drama from the trade relations to currency weakness and more. As a result, we saw China stocks get crushed for the majority of the year and only just start to improve. For 2019, I am looking to capitalize on this. A lot of these companies have had revenues, earnings, margins, you name it, improve over the past few years but they are trading at very low multiples. The trade-war has been the focus and while I do not think it will disappear in 2019, I think most of the fear is already priced in.

Matt Bohlsen: My top 5 tech trends for 2019 are 5G, autonomous vehicles, artificial intelligence, Internet of Things [IoTs], and cloud data storage expansion. Many of these themes are just starting to grow now so will take about 3-5 years to really see the full impact.

Billy Duberstein: I am leaning towards quality and balance sheet strength. Many high-quality companies have been sold off really hard, so it's a great opportunity to upgrade the quality of your portfolios. Market leadership and a great balance sheet can help mitigate (or take advantage of) near-term volatility, especially in a rising rate environment. Fortunately, there are lots of leading tech companies that are currently in the best financial shape of their lives after the boom times of 2016-2017. Still, I think we will have a somewhat binary outcome in tech, revolving around US-China trade talks. If the U.S. and China make a deal that investors believe in, we could have a huge rally. If we don't, we could languish here. Hard to think it could get worse, but then again, I didn't think we'd be at these levels we're at today.

Mark Hibben: I'm mainly hoping that prices stay low for the tech companies I'm interested in so I can load up before prices go back up. For the time being, I'm content to wait until I see some signs of market stabilization, and because I can't afford to buy any more at the moment. I am becoming concerned that the markets could induce a recession through a self-fulfilling prophesy, but right now, the indicators are just for a slowdown. The overall performance of the U.S. and other world economies in 2019 is going to weigh heavily on investors no matter what.

Juan Carlos Zuleta: In 2019 I am preparing for more news on electrification of the global automotive industry with China consolidating its leadership and North America surpassing Europe in the second place, which is altogether likely to exert much more pressure over the energy lithium value chain.

SA: What is one of your best ideas for 2019, and what is the story?

Hans Hauge: I think Bitcoin ( BTC-USD ) will be the best performing asset in 2019. Since 2010, we've seen the hash rate double 30 times, the number of transactions double 11 times, and the price double 16 times. Each time we see the price hit a new factor of ten (which has happened five times already), there's a pull back and a "crypto winter." During this crypto winter, the technology continues to be upgraded, improved - it evolves. Right now, the exact same thing is happening. Bitcoin's average fee at this activity level was $10-$20 earlier this year, now it's less than $0.40. A majority of the arguments against Bitcoin are based on two things (1) people don't understand what it means, so they just can't process what success would look like or (2) they don't know what drives the value and they just aren't educated on the topic. However, if you really dig in, you'll see why some very smart people have dedicated their careers to the cryptoasset space. Blockchain technology is changing the world, and Bitcoin is the gold standard of the blockchain universe.

Tom Lloyd: I expect the market to be down in 2019 and 2020. Therefore, I am very interested in stocks that are already beaten down to their bottoms, have very little downside risk and will bounce back. We will add Facebook, Apple, Nvidia and Netflix to our model portfolio as they bounce up from their bottoms. Micron is not one I am interested in bottom fishing. I think Amazon and Google will beat the Index, but I don't think they will be in our model portfolio. We let our computer Buy/Hold/Sell Signals tell us on a daily basis.

Elazar Advisors, LLC: I have to tell you there are not so many good ideas out there right now. You have to respect slowing fundamentals. If you do, then you don't want to own much of anything. There are a few great ones though and we've managed to catch big earnings performers in this market downdraft. Twitter is starting to see a big earnings inflection. There was that Citron call that Twitter's going to get hit because of trolls harassing people but Twitter's been on to that already. There was no new news in that call. Twitter's priority throughout '18 was "health" removing bad actors. The recent report that Citron cited I think changes nothing in Twitter's already proactive process. In the meantime, more importantly, we saw Twitter with a big Q3, and Q4 is seasonally stronger than Q3. They are making gradual changes to their network that are benefiting usage and advertiser ROI (Return On Investment). They might have an opening with Facebook and Google woes as well. Based on blow-out earnings potential, we see the stock can approach the high-50s which is like 100%+ upside potential.

Damon Verial: As previously stated, I believe 2019 will see both the peak of the bull market and the beginning of a bear market. Thus, my thesis for 2019 is not single-fold but two-fold. The market should represent an inverse parabola in this year, so my best idea for Q1-2 2019 will be bullish, while my best idea for Q3-4 2019 will be bearish. As Q3-4 is too early to call, I will simply answer that my best pick for this recent correction and the bounce back is Arista Networks ( ANET ), a fundamentally solid company still in a growth phase unfairly devalued by the recent selloff and one on which I have recently discussed in my newsletter.

Michael Wiggins De Oliveira: Every single large tech company is laser focused on content: either scripted or unscripted. Netflix accomplished the unthinkable and very quickly. It has added 130 million subscribers to its platforms by focusing in on large quantities of scripted content. Furthermore, Netflix's platform has carved out strong time share in consumers' viewing time. It has indeed been so successful that well financed companies are now all trying to play this same game. Accordingly, 2019 will see Apple enter the foray as well as Disney+. Alphabet's YouTube has also spoken about its plans to increase viewers' time on YouTube as an educational tool. Additionally, Facebook Watch has also shown determination to aggressively increase the amount of time its users spend watching and interacting with Watch's content. Obviously, we also have Amazon Video playing this game too. However, a meaningfully less discussed company which I believe might succeed in surprising many investors in 2019 is Discovery ( DISCK ), of which I'm a shareholder. Discovery's business model is different from that of Apple's, Amazon Video or Netflix, in that Discovery's content is unscripted and very inexpensive to produce. In fact, not only is Discovery's business model is very cost-effective but Discovery has the IP on all of its content. For viewers of specific genre, be it sports, such as golf on the brand new Golf Tv platform, or Olympics through Eurosports, Discovery leads. Also, among women Discovery has a particularly strong market share. And while the self-propelled myth of cord-cutting appears to be engulfing Wall Street, this has left Discovery trading irrationally cheap. For FY 2019 Discovery is roughly guiding for $3 billion of free cash flow. Which means that currently, Discovery is trading for less than 7 times free cash flow. Compare that with Netflix, which will not have free cash flow for many years, and in the best case scenario, by my own estimates not likely to generate more than $2 billion of free cash flow once it tapers off its elevated content investment - leaving it trading at 50 times future free cash flow multiples. While at same time, its top line is already slowing down to below 30% year-over-year.

The Freedonia Cooperative: Anyone following my posts and/or is part of The Coin Agora knows I love Vechain, a logistics blockchain company out of China. Right now, its coin is super discounted (in my opinion) and gives investors a chance to lock up a significant amount of coins before its platform really gets started. In the coming year(s), Vechain will host DNV GL's food shipping blockchain and BYD's electronic car aspect of the carbon credit system-just to name two of many partnerships. It's my favorite bet in crypto and it has nothing to do with disrupting the worldwide financial system-it's just putting logistical data on a blockchain for better record keeping.

Joe Albano: The best idea for 2019 is to have cash at the ready. We're in a downtrend in tech and there's no reason to rush in yet. That being said, I like Broadcom ( AVGO ). It's a standout in the tech space - an outlook that is robust and bullish - while the rest of the sector is not on a firm foundation. Raising the dividend 51% was the "put your money where your mouth is" moment and management is putting forth all the right signals. I'm a buyer on technical support tests.

App Economy Insights: In a market that is likely to be volatile and possibly with depressed valuation and the prospect of the r-word (recession), I am looking forward to strengthening positions in Enterprise Software. Indeed, Enterprise Software is likely to shine in a slowing economy - while consumer goods may suffer, enterprise software will remain relatively constant. Thus, there will be no shortage of demand for the best-in-class tools that empower the data science, finance, sales and marketing or engineering teams to achieve greatness.

B&B Market: I focus on Chinese ADRs, that is my specialty. The idea that has been on the forefront of my mind lately is Momo ( MOMO ). The stock reached all-time highs (near-$60) earlier in 2018, but is now back down into the low-$20s. Both top-line and bottom-line are growing at strong double-digit rates, MAUs are increasing every quarter, and the company has recently acquired Tantan, which is also growing in popularity. All of Momo and Tantan are internet platforms that are not impacted directly by tariffs from the trade tensions. However, because of a recent guidance cut (still growing at 40+%), institutional analysts have cut the PT from $60 down to $31. I may have missed the class that states short-term issues warrant a 50% reduction in valuation in the long-term. I am very bullish on this stock and believe that a majority of the Chinese ADRs are undervalued as a result of market overreaction from the trade war.

Matt Bohlsen: My best idea is to use the current tech and semiconductor downturn to start to accumulate positions at cheaper prices ready for the next upcycle. For example, I would be accumulating the following:

  • 5G - Qualcomm
  • Autonomous Vehicles - Alphabet (Waymo)
  • Artificial Intelligence - Nvidia
  • The Internet of Things - Skyworks Solutions
  • Data Storage and the Cloud - Amazon

Others that have broad exposure to the above themes are also worth considering such as Samsung Electronics ( SSNLF ), Baidu ( BIDU ), Intel, and Microsoft. Cashed up giants Apple, Facebook, and Microsoft are also good tech names to accumulate at yearly lows.

Billy Duberstein: I rode Micron all the way up in the first half of 2018 with terrific gains and then unfortunately rode it all the way back down. It currently trades just over tangible book and the company has $3 billion net cash. The stock just sold off on what *could* be a trough quarter guidance that missed expectations but really doesn't look so bad relative to the current valuation of the company if it is the low point (or close to it) in the cycle. $2 billion net income and ~$1 billion FCF for the next quarter on a $35 billion market cap ain't so bad, especially if it's a trough. Last year the company made $14 billion and ~$10 billion in FCF. The DRAM oligopoly seems to be working to control supply (Micron just announced capex cuts) and the long-term demand outlook for memory should be strong and diverse, even if we are currently in a demand "air pocket" (fueled by the boom-bust phenomenon I discussed above). Micron is also structurally a much, much more profitable company than it was just three years ago relative to its Korean competitors, so it should be able to stay profitable in a downturn while also buying back a significant amount of stock at the same time, which it didn't have the means to do in 2016. If the downturn turns out to be milder than feared, this historically low-multiple stock could re-rate higher coming out the other side. You may need to wait a couple quarters and have a strong stomach, but there's multi-bagger potential here, barring a global recession or trade war escalation.

Mark Hibben: I think Nvidia is by far the most undervalued stock in my portfolio. It's fundamentally a new paradigm semiconductor company being priced as if it were an old paradigm company with no future. Of all the tech companies in my portfolio, I consider Nvidia to have the greatest growth potential in relative terms. Nvidia is pioneering in many fields, including AI, autonomous machines and high performance computing. Nvidia's Turing architecture GPUs are available for professionals and gamers, and provide real time photorealistic rendering that would have been considered impossible a year ago. Nvidia has no competition in this new category of graphics visualization (called ray-tracing), and has ensured continued leadership for many years due to its ray-tracing patents. I doubt that there's market for three major GPU suppliers (Nvidia, AMD, and Intel), and I believe that AMD will be forced to spin off or sell its Radeon GPU business since it won't be able to compete in ray-tracing. Intel is the most likely buyer.

Juan Carlos Zuleta: Tesla is certainly my best bet for 2019 because despite all the problems it faced throughout the year, it demonstrated its shareholders its strength to preserve the value of the company. In this connection, we have to be vigilant as to how and when it proceeds to start assembling EVs in China and launching its long-awaited more affordable Model 3 in the U.S. and elsewhere.

Jeffrey Himelson: I see Fitbit receiving FDA clearance, entering into numerous new partnerships and generating returning revenue streams, which will propel the stock in 2019.

***

Thanks to our panel for sharing their insights on the fast moving tech sector. If you want to follow up on any of their public work or their Marketplace services, here are the links:

We continue our Marketplace Roundtable series with a look at a few more sectors this week, before switching to thematic approaches next week, as well as our compiled Marketplace authors' top ideas. Stay tuned, and happy holidays!

See also Amazon.com Hasn't Looked This Tempting In A While on seekingalpha.com

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


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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