To say it's been a tough year for tech stocks is an understatement, with the tech-heavy Nasdaq Composite dropping into bear market territory and stalwarts such as Apple and Amazon extending weeks-long losing streaks.
But the selloff could be a "generational buying opportunity" for the right names in tech that could win big in a few years' time, according to Wedbush analyst Daniel Ives.
"This is not a Dot-com Bubble 2.0 in our opinion, it's a massive correction in a higher rate environment that will cause a bifurcated tech tape with clear haves and have-nots of tech," he wrote in a research note.
To be sure, tech bears have a very strong case to warn against investing in the sector. Tech stocks have continued to drop precipitously as the Federal Reserve hikes interest rates and scales back on its bond-buying program, causing bond yields to rise. Increases in bond yields cut into the current discounted value of future profits -- the main criteria on which many tech companies are valued.
Bearish investors fear that multiples will continue to compress further as they have over the last few weeks -- the Nasdaq has dropped 27% year to date. There are widespread concerns that the Fed's policy could be driving the U.S. economy into a recession.
Ives pushed back on these assumptions Friday, saying the warnings were overplayed. Tech stocks already have factored in a mild recession, he said. In addition, an economic downturn could be what ultimately catalyzes the next innovators of the technology cycle.
Investors should be looking to own a mix of profitable and value tech names, while parsing out the best in the high-growth category, otherwise they may miss out on the best high-growth names after the storm has cleared.
In his view, the stocks to own include companies that are betting big on macro-cloud computing, cybersecurity, 5G smartphones, and electric vehicles. Think: Apple, Microsoft, and Tesla, which are Ives' large-cap top picks. He also favors cloud-exposed names like Amazon.com, Alphabet, Oracle, and Adobe. His cyber security basket includes Palo Alto Networks, Check Point Software, Zscaler, Fortinet, Tenable, CyberArk Sofware, and Crowdstrike.
While Tesla is the biggest name in the EV category, he also highlighted Li-Cycle ( LICY), XOS ( XOS), Hyzon Motors ( HYZN), and ChargePoint ( CHPT). Value tech with strong end markets included Nice (NICE), Verint (VRNT), Progress Software (PRGS), Ziff Davis (ZD), and Consensus Cloud Solutions ( CCSI).
The have-nots may well turn out to be work-from-home plays, e-commerce stocks, real-estate heavy bids, and companies with bad management, he added.
Ives' optimism isn't shared across the industry. Cole Smead, president and portfolio management at Smead Capital Management, said the firm was leaning toward energy and commodities in the short term, as the sector outperformed tech. He believes the tech sector is "nowhere near" bottoming out.
Citi's Robert Buckland was also more cautious, outlining in a research note Thursday that the company's global equities strategy currently favored cheap financials and commodity stocks over more expensive tech-related trades.
Whatever the case may be, tech investors should buckle up for a few more months of pain. But those that weather the storm may be lucky enough to stumble upon a pot of gold at the end of the rainbow.
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