The trade war rhetoric has had a negative impact on investor sentiment as well as prices of many tech stocks. As weeks go by, not many analysts believe that the U.S. and China are likely to conclude a comprehensive trade agreement soon. The negotiations may well drag out right up to the U.S. presidential elections. Therefore, the recent volatility we have experienced, especially in the tech sector, is likely to stay with us for a while.
Today, I am going to discuss three tech stocks that may be appropriate for investors who are looking for stocks that have had pullbacks in price and thus offer better risk/reward ratios than they did several months ago. These stocks are Alibaba (NYSE:BABA), AT&T (NYSE:T) and Oracle (NYSE:ORCL).
I believe investors who buy into the shares of BABA, T or ORCL at any upcoming dip or even around the current levels will be rewarded well in a few years.
Shareholders who are still concerned about potential short-term risks may also consider hedging their positions. In that case, covered calls or put spreads with July 19 expiry could be appropriate as straight put purchases are likely to be expensive due to heightened volatility.
Notable Tailwind Catalysts: High growth in business segments, including e-commerce, cloud and electronic payments; potential end to U.S.-China trade wars
Expected Price Range Until Next Earnings in late August: $135-$165
The current environment offers valid reasons to be concerned about Chinese stocks, including Alibaba, the e-commerce giant. Alibaba’s share price has thus seen a significant amount of weakness of late. Over the past year, the stock is down over 21%.
BABA stock has been increasingly volatile on the back of the recent earnings released on May 15 as well as the U.S.-China trade war and Chinese economic concerns.
Yet Wall Street concurs that with a population of almost 1.4 billion people, China’s economic growth is still in its early stages and that the Chinese middle class is likely to expand for a long time.
Furthermore, consumer disposable incomes are also going up, fueling growth in many sectors, including e-commerce.
In fact, the e-commerce market in China is forecast to almost double within the next four years to reach $1.8 trillion. Therefore, even if the Chinese economic growth pauses for a few quarters to come, the country’s growth potential is intact.
Alibaba’s current share of the Chinese e-commerce space is almost 60%. Many analysts believe that BABA’s bottom line is not going to be too adversely affected by these current trade wars as its business model is tied to China directly, decreasing the long-term risks of bi-party trade wars.
BABA’s core e-commerce business contributes to about 85% of its revenue. Yet BABA is rapidly expanding into many other lucrative industries, including cloud computing infrastructure, digital payments, online entertainment and food delivery.
Alibaba’s concentrated push deeper into cloud computing is increasingly being compared to the success of Amazon’s (NASDAQ:AMZN) cloud business. In cloud computing, BABA is now the market leader in Asia.
In 2018, Alibaba merged its food delivery platform Ele.med with its lifestyle app Koubei to be able to capture a higher market share in servicing “hungry customers” and to better compete with Meituan, which is backed by Tencent Holdings (OTCMKTS:TCEHY).
As a result of increased diversification, Alibaba’s revenue is expected to grow by double-digit-percentage rates. Such a growth rate would indeed be impressive for a company with a market cap of $415 billion.
On May 15, when BABA released its quarterly results, both sales and earnings exceeded estimates. Total revenue came at $56.1 billion, an increase of 51% year-over-year.
In the earnings statement, shareholders paid attention to four main areas:
- Core commerce (BABA’s largest segment grew 54% YoY);
- Cloud computing (revenue soared 76% YoY);
- Digital media and entertainment (revenue increased 8% YoY); and
- Innovation initiatives (where revenue jumped 22% YoY ).
One important highlight was that BABA’s mobile monthly active users (MAUs) on its e-commerce platforms reached 721 million. The owners of BABA stock will be interested to know the corresponding number to be released in the next statement in late August.
Another metric to pay attention to is Alibaba’s operating margin, which currently stands at 15%. Over the years, BABA’s high operating margin has contributed to its profitability, which has been even higher than that of Amazon (NASDAQ:AMZN). BABA’s net profit margin is also over 23%. In short, Alibaba is showing strong performance across the board.
Finally, forward-looking investors may want to pay attention to BABA’s international growth numbers too. Currently, more than 90% of the e-commerce giant sales are made in China.
But BABA also has investments in start-ups in South Asia and Southeast Asia. Higher incomes and rising internet penetration rates are likely to strengthen both regions’ e-commerce markets and contribute to BABA’s bottom line.
Given the fundamental strength of the company, I regard BABA stock buy-worthy at current levels.
However, in the coming weeks, I do not expect BABA stock to regain its recent high of $195.72, which was last seen on May 3.
Instead, BABA stock is likely to trade in a range, between $165 and $135, for several weeks, possibly until its next earnings report expected in late-August.
The daily volatility of Alibaba stock is high, giving it a wide trading range, so short-term traders should proceed with caution. Nonetheless, long-term investors could view any decline in BABA stock as a good opportunity to buy into the shares.
Notable Tailwind Catalysts: High growth in business segments; growing content through WarnerMedia; decreasing debt levels; respectable dividend yield
Expected Price Range Until Next Earnings in late July: $30-$37.5
As internet-based communication becomes increasingly integrated into our daily lives, I find AT&T shares well-positioned to benefit from various commercial opportunities that would eventually benefit the stock price. June has already rewarded T investors well; the stock is up over 7% so far.
Yet over the past few years, AT&T stock had lagged behind the broader market. Within the past 12 months, the stock has basically remained flat. The T share price on June 14, 2018 closed at $32.52. A year later, T stock is hovering around the same level.
Even though the company has a strong brand and wireless infrastructure — two factors that are likely to make it a dominant player in the 5G sphere — the AT&T stock price has not yet reflected the company’s robust forward-looking potential.
Thus, now may be a good time for investors to decide whether the rest of the year could witness a sustained up move in the price of T shares.
AT&T reported Q1 2019 earnings on April 24. With a market capitalization of $230 billion, the Dallas-based group breaks down revenue into six main segments:
- Mobility (includes wireless subscribers)
- Entertainment Group (includes DirecTV and U-Verse customers)
- Business Wireless (provides services to companies and the government)
- Latin America (includes Latin American and Mexican operations)
- Warner Media (includes HBO, Turner and Warner Bros.)
- Xandr (handles all advertising business)
This diversified revenue stream of T stock is important for long-term shareholders who do not want to worry too much about short-term volatility.
The company’s key Mobility wireless segment generated revenue of $17.57 million, up 1.2% year-over-year. AT&T also added wireless subscribers and its domestic wireless business is neck and neck with Verizon (NYSE:VZ) for market share.
In June 2018, a federal court approved the merger of AT&T’s $85 billion acquisition of Time Warner — a deal that has now turned AT&T into a media giant and “content king.”
This merger has been weighing on the T stock price for some time; however, the rest of 2019 should see the question marks slowly disappear.
In the quarterly report, investors cheered that the group was selling off assets to decrease its debt burden. Indeed, over the past few quarters, AT&T’s debt load had been on Wall Street’s radar. The company finished 2018 with $171 billion of debt.
Acquiring Time Warner has bloated this debt load. However, the communications giant is now working to cut costs and debt at the same time. Management realizes the importance of decreasing the level of debt sooner than later.
In addition to the company’s strong earnings power through telecom and media-related operations, T stock also offers a strong dividend yield at over 6.3%. AT&T’s dividend is a big attraction for many long-term investors seeking passive income.
In short, along with the rest of the market, T stock could experience volatility near term. But long-term, the prospects for AT&T stock are robust and it offers a respectable dividend yield for income investors.
Notable Tailwind Catalysts: High growth in business segments; moving on from recent regulatory probes and legal headlines; 5G Leadership; respectable dividend yield
Expected Price Range Until Next Earnings in late July: $55-$75
Shares of Qualcomm, the leading supplier of modem technology for smartphones, have been in a free fall since early May.
On May 2, QCOM stock saw an intraday high of $90.34. Then on May 29, Qualcomm shares closed at $65.76.
Legal headlines were mainly behind the unforgiving drop in the QCOM stock price. A federal regulatory probe recently concluded that the company had violated antitrust laws and that its licensing fees were too high.
Qualcomm stock reports revenues in three main segments:
- QCT (Qualcomm CDMA Technologies);
- QTL (Qualcomm Technology Licensing);
- QSI (Qualcomm Strategic Initiatives)
Wall Street saw the ruling as having a negative impact on Qualcomm’s QCT (i.e., chipmaking) and QTL (i.e., patent licensing) segements.
Qualcomm is the largest maker of chips for smartphones, and its chipsets account for about two-thirds of its total revenue. Its chipmaking QCT segment produces the Snapdragon mobile system on a chip (SoC), a semiconductor product which bundles together a CPU, GPU and modem in a single unit.
Its second-highest source of revenue is mobile-phone royalties and licensing. About 60% of its pre-tax profits are from its patent-licensing division, thanks to royalties from 3G and 4G technologies the chip giant helped invent.
Qualcomm’s patent portfolio is crucial for the company and the licensing business is the higher-margin segment of the three segments.
The chip giant is currently appealing this ruling. Although the company may be successful in overturning the ruling, going forward, there is likely to be further choppiness in the stock price.
In other words, if the company loses the appeal, the result could be fewer chipset sales in the QCT segment as well as much lower QTL patent licensing revenue for Qualcomm stock.
On the other hand, a successful appeal could push QCOM stock upward, possibly to new highs. Yet, it will probably be several months before the company has a final answer from the courts.
Analysts believe QCOM will also play a dominant and early role in 5G, replicating its success with 3G and 4G mobile networks. If the analysts are correct, then Qualcomm stock is indeed a good pick for long-term investors. The company is likely to provide a significant part of the intellectual property that will be used to develop 5G communication standards.
Recent legal troubles and the subsequent share price drop in QCOM have followed the positive headlines in the second half of April. The chipmaker and Apple (NASDAQ:AAPL) had announced earlier that they had finalized a favorable agreement regarding intellectual property licensing fees for chips used in Apple’s mobile devices.
This agreement now dismisses all outstanding litigation between the two parties. Because of the success of the settlement, QCOM believes its revenues are likely to double annually in Q3 (the group’s fiscal 2020 starts on Oct. 1).
In other words, over the past few weeks, important legal developments have been the main driver behind the major volatility in QCOM stock. Therefore, as the dust settles, I expect investors to concentrate once again on the bottom-line results as well as the leadership position of the company.
Meanwhile, the 3.6% dividend yield of QCOM stock and the generous stock repurchase program are likely to act as support in case the price of Qualcomm shares declines further in the coming weeks.
For investors not familiar with Qualcomm, this drop in its share price may provide a good opportunity to research the company and decide if they would like to include QCOM stock in a long-term portfolio.
Tezcan Gecgil holds covered calls on T and VZ stock (June 21 expiry).
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