Following the onset of the pandemic, most tech stocks not directly related to mitigating the pandemic tumbled due to deflationary pressures. However, the unprecedented wave of stimulus programs bolstered equities, particularly risk-on names. Now that the Federal Reserve seeks to unwind prior excesses, deflationary forces again dominate the discourse. Nonetheless, for contrarian speculators, this narrative reopens the door for tech plays, specifically Sea (NYSE:SE) and MercadoLibre (NASDAQ:MELI)
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To be sure, each of these market ideas features a distinct angle to tech stocks that will be discussed below. For now, let’s set up the broader framework impacting the tech segment. As mentioned above, the stimulus measures bolstered the wider investment markets because of the impact on the dollar’s purchasing power. As the Fed lowered interest rates, the subsequent currency erosion forced a fundamental narrative: use it or lose it.
Obviously, retail investors decided to use it, that is, invest their dollars in high-profile securities, which involved tech stocks. However, the Fed must now unwind the monetary punch bowl through tightening initiatives (i.e., raising the benchmark interest rate). In this scenario, the dollar’s purchasing power rises, all other things being equal.
In turn, the framework for the dollar features an antithetical dynamic compared to the prior paradigm: save it and gain it. Stated differently, if investors merely sit on cash, the Fed’s monetary tightening could result in gradual wealth expansion. That’s not a great backdrop for tech stocks, which generally perform best in a controlled inflationary ecosystem.
Moreover, because the monetary environment faces deflationary risks, Wall Street must account for this by pricing down growth-driven tech stocks. However, the volatility may have gone overboard with certain compelling tickers, particularly SE and MELI.
Sea
A conglomerate based in Singapore, Sea operates across three businesses: digital entertainment, e-commerce (including digital payments), and financial services. Fundamentally, the attractiveness of SE as one of the tech stocks to wager on is market expansion opportunities.
Currently, the internet penetration rate in Southeast Asia is around 75% in the more mature economies to about 60% in the less developed areas. In contrast, internet penetration in the U.S. stands at around 92%. Therefore, companies like Sea enjoy greater upside opportunities bringing vast population zones up to speed digitally. From there, it can integrate its multi-tiered digital services, becoming the impacted regions’ go-to brand.
Further, getting the internet penetration rate from 92% to 100% represents a last-mile problem. Getting those last remaining holdouts requires extensive time and resources. However, moving the penetration rate from 70% to 90% represents a much easier challenge. Essentially, Sea can use wholesale methods to implement integration at lower cost and time expenditures.
To be fair, SE represents a substantially risky idea among tech stocks. Down 77% on a year-to-date basis, one of the fundamental problems affecting Sea is its poor-quality business. For instance, its return on equity is over 60% below parity. However, with the massive growth opportunity in Southeast Asia, SE could be intriguing for gamblers.
Is SE a Good Stock to Buy?
Turning to Wall Street, SE stock has a Moderate Buy consensus rating based on seven Buys, three Holds, and zero Sells assigned in the past three months. The average SE price target is $108.20, implying 115.1% upside potential.
MercadoLibre
Another risky but compelling prospect among deflated tech stocks to buy is MercadoLibre. An Argentine company based in Montevideo, Uruguay, MercadoLibre operates online marketplaces dedicated to e-commerce and online auctions, per its corporate profile. Fundamentally, the bullish case for MELI stock centers on the massive potential of the Latin American market.
According to Statista.com, South America represents the segment with the largest internet penetration rate at 72%. As with Southeast Asia, the penetration rate varies depending on the level of maturity of the underlying economies.
Per the World Economic Forum, “While 87% of the population lives within range of a 4G signal, actual usage and penetration remain low (37%). Only four out of 10 rural Latin Americans have connectivity options, compared with 71% of the population in urban areas.” Therefore, MercadoLibre enjoys significant opportunities to dominate the Latin America segment.
In addition, Latin America more or less features a favorable population pyramid. This means young workers are plenty and able to replace older workers. Over time, this should help boost MELI compared to other commerce-related tech stocks.
Finally, the main difference in risk profile between MercadoLibre and Sea is the return on equity. For the former company, this metric pings at 28.6%, ranked better than 84% of the competition.
Is MELI a Buy or Sell?
Turning to Wall Street, MELI stock has a Strong Buy consensus rating based on eight Buys, one Hold, and zero Sells assigned in the past three months. The average MELI price target is $1,263.89, implying 52.3% upside potential.
Look Forward with Tech Stocks, Not Backwards
Representing one of the hardest-hit equity subsectors, tech stocks don’t provide much confidence at the moment. However, if you drill into the longer-term narrative for SE and MELI, these ideas bring a credible narrative to the table. You’ll need patience and tolerance for risk, but the upside potential is there.
