Apple has a big problem on its hands. While the company debuted its new suite of iPhones last year, with the largest and most expensive models getting much of the attention. One of Apple’s work horse phones, the lower priced iPhone XR, has not been selling nearly as well as Apple hoped. The phone, which is priced well under the top models, has particularly been facing weak sales in China, Apple’s most important market. Home grown competition has stolen much of the middle market which the phone is supposed to occupy.
FINSUM: This Wall Street Journal puts it nicely—the phone is being passed over by both bargain hunters and status seekers. In other words, it doesn’t have a niche.
What should investors do about tech stocks? That is a big question. After an extraordinary run over the last couple of years, things have a hit a real rough patch. Worries about regulation loom. With that said, Goldman Sachs is optimistic on some large and midsize tech stocks. One of its high conviction picks is Netflix, which is down around 30% recently. Goldman is steadfastly a believer, however, saying “We believe Netflix represents one of the best risk/reward propositions in the Internet sector”. Other names to look at from Goldman include Expedia and Etsy.
FINSUM: What we like about these three names is that they seem the least likely to be impacted by any new privacy regulations.
There has been a lot of momentum flowing against tech stocks right now, and especially the FAANGs. Facebook has taken a great deal of the pain, with numerous headwinds facing shares. However, the reality is that the company has a very solid underlying business, and the recent volatility means it also has an attractive valuation. According to Deutsche Bank, “We continue to view Facebook as the best risk/reward in large cap internet given the potential for core Facebook engagement to stabilize … and given the extremely attractive current valuation”.
FINSUM: Facebook has been going through a very rough period over the last year, but the negative news cycle is going to abate, and when it does, the stock seems likely to gain.
Amidst all the gloom gripping the markets, there have been a handful of positive publications about 2019. One of them was just put out by Nomura. The bank published a list of 5 tech stocks that might surge in 2019. The call is an ambitious one given the trend of how tech shares have been going. The shares are not all FAANGs either, which makes them more interesting. With further ado, the list is: Google, Amazon, Salesforce, Broadcom, and AT&T.
FINSUM: Amazon seems like a good call to us, especially after its recent declines. The company is going to see increasing margins as it consolidates its dominant position and earns more recurring revenue. Salesforce is also an interesting business.
In what comes as an almost apocalyptic announcement for Apple investors, President Trump indicated yesterday that he may impose a tariff directly on iPhones. When asked about whether he would do so, Trump said “Maybe. Maybe. Depends on what the rate is … I mean, I can make it 10%, and people could stand that very easily”. One analyst summarized the development this way, saying “The Street will not be taking this news lightly as with the litany of bad news Apple (and its investors) have seen over the last month … this tariff threat on iPhones out of left field from Trump and Beltway will surely add to this white-knuckle period for Apple”.
FINSUM: We don’t think this will happen. If Trump tried to raise iPhone prices 10% he would likely have a popular revolt (from both sides of the aisle) on his hands. He certainly doesn’t want that.
As of today, the FAANG stocks have shed over $1 tn in market cap since their recent highs. The turmoil pulled markets down around 2% across indices, with the Dow seeing the biggest drop at 2.21%. The losses mean once again that indices have lost virtually all their gains for the year. As one CIO put it, “absolute bloodbath for technology stocks”. The selloff seems very forward looking, as investors are quite focused on what might go right and wrong in 2019. The biggest worries seem to be around trade.
FINSUM: Here is a question: why exactly is tech selling off? Apple obviously has its own problems, but those particular issues don’t seem very relevant to Facebook etc. Panic?