Tech stocks had a great year in 2019, and institutional investors remain bullish on the sector for 2020—maybe a little too bullish.
That’s one of the conclusions of a recent investor survey conducted by Wolfe Research tech strategist Steve Milunovich. He writes in a research note Friday that Wolfe expects high single-digit overall stock market returns this year driven by central bank easing, moderating trade tensions with China and the probability of a moderate Democratic Presidential nominee. The tech sector, he adds, should do well in that environment.
But Milunovich adds that he’s recommending a market weighting in tech shares, asserting that the sector is “overbought near term,” that earnings expectations may be too high for 2020, and that the “malinvestment created by money printing” will come home to roost, perhaps in 2021 rather than 2020.
Milunovich finds other warning signs. “The stock market cap-to-GDP ratio is about 150%, the highest since 2000, and a number of valuation metrics are near extreme levels,” he writes. “Central banks’ easiness is a source of near-term support but long-term risk. We would argue that easy money led to the bubbles of 2000 and 2008 and that we may be in the midst of a credit bubble.”
And he points out that tech stock valuations are at the highest they’ve been since 2000. His research note includes a list of 39 companies trading for more than 10 times next 12 months sales—most of them enterprise software companies.
Nonetheless, Milunovich reports that his latest tech investor survey found 67% of respondents bullish on the market, with 6% bearish and none “very bearish.”
In the survey, investors were asked to name their favorite stocks—and their least favorite.
(ticker: CRM) was the most popular long. Milunovch notes that the stock has underperformed while digesting its June 2019 acquisition of data analytics provider Tableau Software for $15.7 billion, and that “there is anticipation of a catch up.”
(MSFT) was next on the list. “Given Azure momentum, there is little negative to say other than tougher compares and an expanded multiple,” he writes.
(NVDA) was third on the list, but it also showed up among the ranks of the least liked. “We agree with the positive view given growth in AI and new product offerings for inference [artificial intelligence] and the edge.”
- Rounding out the top five list:
(FB), despite regulatory concerns. Milunovich notes that the compensation plan for new Alphabet CEO Sundar Pichai ties stock vesting to the stock’s relative performance.
As for the stocks investors like the least, the roster is dominated by legacy tech.
(IBM) tops the list, with
(ORCL) next. “Investors aren’t yet convinced by IBM’s Red Hat acquisition nor Oracle’s autonomous database offering,” he writes.
(CSCO) recently cut top-line guidance by about $1 billion, and “a quick recovery is not expected.”
(INTC) also is among the least loved. Despite “reasonable” valuation, Milunovich finds that the chip giant has “execution and [market] share challenges.”
- And then there’s Nvidia again. He notes that “the bear case includes high valuation and rising competition from Intel, AMD and startups.”
The survey also asked about tech trends.
“The hottest tech trend is 5G,” he writes. “Marketing of 5G handsets could lift sales later in 2020, but we think the real impact will be in enterprise IoT applications later. Public cloud continues to benefit hyperscalers [like Amazon Web Services, Microsoft Azure and Google Cloud] and their component suppliers while disadvantaging legacy vendors. AI is more ingredient than product but could prove highly disruptive. Investors seem calmer about regulation, which was the top issue last survey.”
Write to Eric J. Savitz at email@example.com