The Nasdaq now trades more than 20 percent below last November’s high. With Big Tech remaining under downward pressure, other parts of the Nasdaq look promising.
There has actually been a correction phase since February last year. First in the more speculative parts of the market, such as technology companies that are not making profits, SPACs or software companies with extremely high valuations.
Now it is also the turn of the Big Tech stocks. While the Nasdaq is down 20 percent this year, Big Tech companies are down 30 percent. It is a good thing that European investors can get some compensation from the strong dollar. During the reporting of the latest quarterly figures, several Big Tech companies fell through the cracks.
Meta halved, Netflix down by two thirds
Earlier this year, the Meta (Facebook) share halved, the Netflix share even dropped by two thirds this year, and now Google (Alphabet) is also disappointing. Only Microsoft and Apple are still managing to keep it somewhat dry. All these tech giants have benefited greatly from the corona crisis, a period in which almost the entire world was suddenly forced to go to school online, work online and do their shopping online. As a result, the valuation of these companies has risen and, with the opening of the economy, this is partly melting away, helped by rising interest rates that particularly affect highly valued growth companies.
It is precisely at such times that the European Commission comes up with regulations to curb the power of Big Tech. Now that Elon Musk wants to take over Twitter, American regulators will also start imposing stricter requirements. Not so long ago, Big Tech stocks were seen as a good alternative to US Treasuries, but after such a big minus, technology is out of favour. Still, it is unwise to stop holding technology in one’s portfolio. Investors just need to take a more defensive approach.
In that respect, one Big Tech company is not like another. For example, Meta and Alphabet are heavily dependent on advertising revenue, while cash flows at Microsoft and Apple are much more stable. Furthermore, there are alternatives on the Nasdaq that are strongly correlated with the technology sector, but for which a better investment case can be sketched than for many of the highly valued Big Tech companies.
Biotech almost alternative to cash
One segment of the Nasdaq that has been out of favour since early last year is biotech. No less than 600 of the 1450 companies listed on the Nasdaq are biotech companies. A year ago, IPOs were plentiful, but a year later, the majority of IPOs, including biotech IPOs, are trading below their initial issue price. Now, unlike many other companies, biotech companies usually do not go public to cash, but to raise money to invest.
Since these are long-term investments, a large part of the money raised is still liquid. As the share price has fallen, more and more biotech companies are worth less than the cash they have on their balance sheets. In fact, an allocation to such a biotech company is an allocation to cash. Looking at the past, the valuation of biotech companies can be set off against the cash position of the same companies. As a group they are now at the very bottom of the historical range. From that perspective, biotech companies are not expensive.
The price drop is also a direct consequence of the end of corona and the fact that in the current turmoil it is harder to raise money on the stock market. Yet it is precisely the corona crisis that has led to an acceleration in the field of biotech. Vaccines have been developed that we would not have thought possible pre-corona. New techniques and big data have accelerated research. Moreover, biotechnology is not dependent on the ups and downs of the economy and because many biotech companies are listed on the Nasdaq, it is therefore a good alternative to big tech.
Energy technology gets a big boost
The Ukrainian war has given a strong impulse to investment in the field of alternative energy. Several of these companies are listed on the Nasdaq. Whether solar cells or hydrogen gas, many of these companies are more volatile than the big tech stocks on the Nasdaq. For a long time, these stocks also benefited from the energy transition driven by the climate crisis, but as of February last year, they were also among the first Nasdaq stocks to start the correction.
Now, suddenly, the same companies are essential to ensure energy security. Count on substantial investments in the coming years and many companies are now more attractively valued than the Big Tech companies. Furthermore, energy prices are so high that alternative energy is possible without subsidies. The energy transition is an enormous task for the coming years and windmills, solar cells and electric cars alone will not get us there. Now electric cars are rapidly becoming more expensive because many metals have risen sharply in price.
Last year, the price of the metals in an electric car rose even more than the same car depreciated in that year. Globally, only 2% of all cars are electric. Given the availability of the required metals, here too the transition will take some time. High energy prices also make it attractive to innovate and invest in energy technology.
Semiconductor supercycle still in full swing
There was once a time when the semiconductor cycle ran parallel to the PC cycle. Now there are so many devices that semiconductors go into, each with its own cycle, that we are now in the ascending phase of a supercycle, a straight line upwards. There are several interesting segments in the field of semiconductors. The highest margins are made by the companies that design chips, but do not produce them.
These ‘fabless’ companies are mainly located in the United States and they are mainly semiconductors for the latest applications. Then there are only a few foundries in the world, large factories where chips are baked for different parties. These companies operate at maximum capacity, which is good for the margins.
It will take a few years before sufficient capacity has been added and in the meantime the demand for chips is cheerfully rising. Another segment are the integrated chip companies, of which Intel is the best known. Intel may have been overtaken by companies like TSMC and Nvidia, but the company is trying to reinvent itself and in that respect it has the market on its side.
There are also many interesting companies in this segment that make chips that are in great short supply. Think for example of the company On semiconductor that makes all kinds of chips for cars, but also for smart grids and industrial automation, 5G and the Internet of Things.
Finally, there are various suppliers, of which ASML is rated the highest, but then that is also a de facto monopolist. Other suppliers in the chips industry are now also benefiting and are often valued much lower.
Han Dieperink is chief investment strategist at Auréus Asset Management. Earlier in his career, he was chief investment officer at Rabobank and Schretlen & Co. His contributions for Investment Officer Luxembourg are published on Thursdays.
This column was originally published in Dutch on InvestmentOfficer.nl.