Investors have a 'love-hate relationship' with tech stocks now - and experts recommend selectively hunting for bargains while also betting on the major cloud companies
The PHLX Semiconductor Index is hovering near its September lows.
While the Nasdaq Composite ended Thursday in the green, the technology sector isn't out of the woods just yet.
Investors have been taking a more discerning look at highflying tech stocks over the past week as they weigh the growth prospects for major artificial-intelligence companies as well as how the Federal Reserve's next move could affect businesses reliant on outside financing.
The selloff has led investors to seek safety in areas such as Treasury notes and bonds. But investors don't need to abandon tech names - in fact, bailing on the sector now could prove to be an expensive mistake, especially as a valuation reset provides cheap entry points.
Michael Monaghan, portfolio manager at Founders ETFs singled out Dell (DELL) as an attractive opportunity. The hardware company, which builds enterprise AI servers, has seen its stock fall over 20% since the beginning of the week. It was also the worst-performing name in the S&P 500 SPX on Thursday.
"This is a company that is absolutely dominating the on-premises AI server business, so our advice to anyone who has a long-term horizon is that days like today are incredible opportunities to buy," Monaghan told MarketWatch.
Still, investors shouldn't necessarily go and scoop up tech stocks indiscriminately.
For instance, Truist Chief Investment Officer Keith Lerner is not buying the dip on semiconductors just yet. "We're getting closer to a buying opportunity, but we're just looking for some stabilization in the prices," Lerner said, noting that the PHLX Semiconductor Index SOX is approaching its recent lows from September.
He recommends sticking with megacap tech leaders like the "Magnificent Seven," which will be less impacted by high interest rates. When these companies report earnings at the end of the month, Lerner expects their underlying cloud businesses - which include platforms run by Microsoft (MSFT), Amazon.com (AMZN) and Alphabet (GOOGL) (GOOG) - to post strong results.
Lerner also identified the S&P Equal-Weight Index XX:SP500EW as a "natural beneficiary" of money moving out of the market's tech leaders.
The AI boom has powered the S&P 500's SPX bull run since October 2022, and he believes a fifth year of gains is in store for the market.
"Investors continue to have a love-hate relationship with tech," Lerner told MarketWatch on Thursday, pointing out that while the information-technology sector has surged roughly 240% during this bull cycle, it has also weathered five separate double-digit pullbacks along the way. The current tech selloff could actually be a healthy sign, as resets typically conclude only after the market leaders finally take a hit, according to Lerner.
Monaghan believes the selloff is macro-driven, not tech-driven. He attributed the market volatility to escalating geopolitical conflict in the Middle East.
While Anthropic's investor day on Wednesday received mixed reactions from the market, Monaghan said the company's 900% net revenue retention means that fears of open-weight models taking business away from Anthropic are "unfounded."
While Monaghan remains invested in core AI stocks such as Nvidia (NVDA), Meta (META), his portfolio is diversified across other parts of the tech industry and broader economy. "We're a little bit more balanced than, say, the Nasdaq-100, which is really heavily weighted to memory and some of these other more volatile areas," Monaghan said. Micron (MU) is one of the five largest holdings in the Nasdaq-100 NDX by market cap, and shares are down over 10% since the beginning of the week on fears of increased competition from Chinese memory maker ChangXin Memory Technologies (CN:688825).
Monaghan identified cybersecurity stocks such as CrowdStrike (CRWD) and Zscaler (ZS) as high-conviction areas in tech outside of hardware.
Software stocks in general are beginning to hold more appeal, with Evercore ISI analyst Kirk Materne writing Thursday that "there may be something to be said for businesses with predictable revenue streams, entrenched customer relationships and durable cash generation" in a world where investors are scrutinizing AI returns elsewhere in the tech sector.
Microsoft is "too big not to" see some pressure from a broader AI selloff, but to Materne it's still "a stock for all seasons, well-positioned to benefit from enterprise AI adoption over the coming years."
-Christine Ji
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