“When is it time to buy tech? When you stop asking,” writes Savita Subramanian, Bank of America’s head of US equity strategy and quantitative strategy, in a recent note to clients.
In the June 3 note, Subramanian points out that after the dot-com bubble burst in early 2000 it took several years for tech stocks to finally reach their low point. By then, she says, investors had lost interest in the sector.
While tech stocks are in the gutter right now, it doesn’t seem like investors are abandoning the sector just yet. Five months after tech stocks peaked, investors are still overweight tech and tech-adjacent themes, and growth stocks are still expensive, she says.
But when it comes to individual stocks, especially among smaller companies, Equity Strategist and Head of US Small/Mid Cap Strategy Jill Carey Hall has a more nuanced take. She thinks the US is in the late stage of a market cycle, and while that’s a complex environment for tech stocks, there are still opportunities to be found even after the sell-off of the last few months.
“Positioning risk is limited, and we are seeing some momentum in flows and in BofA upgrades relative to downgrades,” she wrote in a recent note.
In that note, Carey Hall and a team of BofA analysts break the tech sector down by industry. The analysts wrote that investors picking stocks in the business software industry should look for “enterprise software names that are larger cap with a GARP profile,” as money-losing companies have fallen out of favor and Wall Street prefers bigger names that are delivering free cash flow growth.
Among chipmakers, the firm says the current cycle might be peaking and a low point in overall sales could be three or four quarters away, which makes the space riskier. Networking and cybersecurity companies are now expecting supply chain problems to last into 2023, but BofA analysts think conditions will improve after that.
“We believe our Buy-rated cybersecurity stocks are well-positioned to benefit from the growing efforts to protect the networks at both the enterprise and consumer levels, fueling the adoption of new security paradigm,” wrote analysts Tal Liani, Jonathan Eisenson, Madeline Brooks, and Tomer Zilberman.
BofA makes a split call on internet stocks, saying that if the US can avoid a recession , companies that gain market share like Amazon, Airbnb, DoorDash, and Snap should outperform, while companies like Alphabet, Match, and Meta Platforms are good picks in a recession because they could cut spending and maintain their profit growth.
Hardware stocks, meanwhile, have done the worst relative to other sectors during the late cycle period and in economic downturns.
With those ideas in mind, Carey Hall says a few companies stand out right now.
“We highlight 8 SMID ideas with 45% avg. implied upside potential to POs, from turnaround stocks with exposure to growth themes (ON) to stocks executing in a challenging supply chain backdrop (JBL) to mkt. share gainers (DASH),” Carey Hall wrote.
The eight stocks are ranked below based on how much upside is available relative to Bank of America’s price targets as of Friday’s closing prices.
Ticker: ZS
Industry: Software
Market cap: $21.0 billion
Thesis: “We believe Zscaler exhibits a superior growth trajectory compared to peers, and we expect continued outperformance driven by their strong product portfolio coupled with favorable industry tailwinds.” — Tal Liani, Jonathan Eisenson, Madeline Brooks, Tomer Zilberman
Price target: $195
Upside to target: 24.9%
Source: Bank of America
Ticker: ON
Industry: Semiconductors and semiconductor equipment
Market cap: $25.7 billion
Thesis: “Our top SMID cap idea due to strong turnaround potential, superior Silicon Carbide (SiC) product and best exposure to hyper growth trends in EVs. ON is a market leader in image sensors and power semis, which are critical to designing greener and more energy efficient devices.” — Vivek Arya, Jamie Zakalik, Blake Friedman
Price target: $80
Upside to target: 27.5%
Source: Bank of America
Ticker: CRWD
Industry: Software
Market cap: $37.2 billion
Thesis: “Following a 20% reduction in the share price YTD, we believe CrowdStrike’s stock is attractive for a few reasons. First, we believe the market opportunity is vast, and the company continues to grow its TAM by introducing additional modules.” — Tal Liani, Jonathan Eisenson, Madeline Brooks, Tomer Zilberman
Price target: $210
Upside to target: 29.5%
Source: Bank of America
Ticker: JNPR
Industry: Communications
Market cap: $9.9 billion
Thesis: “We continue to be positive on Juniper and we believe the acceleration in order growth (four consecutive quarters of double-digit growth on an adjusted basis) will translate into higher revenue growth in 2022 and 2023, especially once supply chain constraints begin to alleviate.” — Tal Liani, Jonathan Eisenson, Madeline Brooks, Tomer Zilberman
Price target: $40
Upside to target: 30.0%
Source: Bank of America
Ticker: JBL
Industry: Electronic equipment instruments and components
Market cap: $8.5 billion
Thesis: “What is impressive is that Jabil has been able to expand revenues, and margins, despite supply chain challenges of component shortages and higher logistics/freight costs, and inflation. Its procurement team has been executing well and management has been able to pass through cost increases to customers.” — Wamsi Mohan, Ruplu Bhattacharya, Esha Vaish, Jong Lee
Price target: $82
Upside to target: 33.5%
Source: Bank of America
Ticker: DASH
Industry: Internet and direct marketing retail
Market cap: $25.2 billion
Thesis: “We believe DoorDash has continued to gain share throughout 2021 and 2022, despite growth converging with the industry (and Uber Eats ).” — Michael McGovern
Price target: $105
Upside to target: 54.5%
Source: Bank of America
Ticker: GTLB
Industry: Software
Market cap: $5.7 billion
Thesis: “We believe the company has the potential to drive growth at a 50%+ rate over the medium term and has potential for a visible path to a positive operating income inflection to emerge as the business delivers high growth and expanding margins above current Street forecasts.” — Brad Sills, Koji Ikeda, Michael Funk
Price target: $65
Upside to target: 57.2%
Source: Bank of America
Ticker: UDMY
Industry: Diversified consumer services
Market cap: $1.9 billion
Thesis: “We view Udemy’s enterprise segment (Udemy Business, UB) as an underappreciated growth driver, as it is continuously strengthening and is expected to contribute over 50% of revenue by 3Q (vs 43% in 1Q). Even as Udemy’s Consumer segment continues to be soft due to COVID and possibly ‘ Zoom fatigue,’ we see UB segment to be the major revenue/margin driver.” — Nat Schindler, Nafeesa Gupta
Price target: $34
Upside to target: 145.7%
Source: Bank of America
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