We’ve all seen how things have gone in the past couple of years. The influx of stimulus into the market, combined with the pandemic, only added to the tech industry’s dominance. Both of these developments increased the value of the technology sector.
Unfortunately, things aren’t the same anymore. Many of the top technology companies’ stock prices have decreased this year, some a little and others drastically.
A number of things have conspired to change the dynamic this year. The reopening of physical eateries and businesses has caused e-commerce enterprises to rethink their expansion plans. Furthermore, the supply chain is proving to be more complicated than anticipated and rising inflation has exacerbated the situation. Also, the recent interest rate hike by the Federal Reserve has intensified the volatility in the market, putting a strain on the technology sector.
In addition, while companies release their financial results for the first quarter of 2022, poor results from the technology industry continue to heighten investor fears about the sector’s lost momentum.
Tech Sector’s Doom Deepens in Q1
The benchmark Nasdaq index, which includes the world’s largest tech stocks, has dropped 23% so far this year.
Amazon (AMZN), Apple (AAPL), and Netflix (NFLX) are all large technology companies that have reported dismal earnings.
Since Jeff Bezos stepped down as CEO, Amazon has posted its first quarterly deficit. In addition, revenue growth fell in the first quarter as e-commerce sales dropped. Amazon’s market cap lost billions due to a slowdown in growth, pressure on profitability from increased costs, and weak guidance.
Meanwhile, during the Q2 conference call, Apple warned that supply chain issues and the resurgence of COVID-19 in China might reduce revenue by $4 billion to $8 billion in the June quarter.
In addition, Netflix lost subscribers for the first time in more than a decade in the first quarter and indicated that the trend could continue. During the first quarter, the corporation lost 200,000 subscribers, which was significantly less than its previous forecast of 2.5 million new subscribers. It also released another depressing prognosis for the following quarter, estimating a loss of almost 2 million subscribers.
Overall, the tech sector appears to be plagued by numerous concerns.
Jason Hollands, managing director of online investment platform Bestinvest said, “While it is difficult to know how long the current turbulence for growth stocks will continue, inflation concerns and the prospect for rising interest rates are not going away any time soon.”
Bright Spots Still Exist
Despite the current sell-off, the growth story for some segments of the technology sector remains intact. The cloud computing category, which has exploded in popularity since the COVID outbreak, is still a very profitable and high-growth sector for the technology industry.
According to a study, the global cloud computing market is expected to reach $947.3 billion by 2026, with a Compound Annual Growth Rate (CAGR) of 16.3% from 2021 to 2026.
Let’s look at two such technology companies that are still appealing in today’s market.
Using TipRanks’ Stock Screener, we selected these two stocks, both of which have “Strong Buy” recommendations and “Perfect 10” scores. In addition, each of these stocks has positive hedge fund signals.
Broadcom (AVGO)
AVGO is a semiconductor technology business that offers a wide range of products. It sells software, radio frequency filters, amplifiers, and semiconductors, among other things.
AVGO has a competitive advantage in its business, thanks to its superior technological capabilities and economies of scale. The stock has increased over 36% in the last year, with a market valuation of $236.8 billion.
The corporation just released impressive Q1 results, with revenue up 16% year-over-year to $7.7 billion. Meanwhile, diluted earnings per share increased 27% year-over-year to $8.39. AVGO reported $3.4 billion in free cash flow, up 2.9% year-over-year.
Following the earnings announcement, Susquehanna analyst Christopher Rolland maintained a Buy rating on the stock with a $680 price target, believing that the firm will benefit from a robust comeback in the enterprise space and continuing hyper-scale ramping.
On TipRanks, AVGO has received a Strong Buy consensus recommendation from Wall Street analysts based on 12 unanimous Buys. The stock is currently trading at $580.10, with an average AVGO price target of $711.67, representing a potential gain of 23% from current levels.
Furthermore, hedge funds have been buying Broadcom stock. TipRanks’ Hedge Fund Trading Activity tool shows that hedge funds increased their holdings in AVGO stock by 623.1K shares in the last quarter.
Workday (WDAY)
Workday provides software solutions for financial management and human resource management. Its cloud-based platform integrates finance and HR systems to help businesses gain analytical insights and make better decisions.
According to the company’s most recent Q4 financial report, both the top and bottom-line numbers expanded. Sales at Workday climbed 21.6% year-over-year to $1.38 billion in Q422, beating the $1.36 billion consensus estimate. Subscription revenues increased 22.2% year-over-year to $1.23 billion. Meanwhile, net earnings per share climbed 6.8% year-over-year to $0.78 in Q421 and beat Wall Street expectations of $0.71 per share.
KeyBanc analyst Michael Turits maintained a Buy rating on the stock but decreased the price target to $268 from $312 on lower peer multiples.
The Street is optimistic with a Strong Buy consensus rating based on 21 Buys and just one Hold. The average WDAY price target of $149.58 implies 60.7% upside potential.
In addition, hedge funds continue to be very positive on Workday stock. According to TipRanks’ Hedge Fund Trading Activity tool, hedge funds increased their holdings in WDAY stock by 1.1M shares in the last quarter.
Wrapping It Together
Though valuation worries, rising inflation, and supply-chain constraints have caused a selloff in tech stocks, the situation should improve over time, and the technology sector should regain strength.
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