Big Tech will ‘have a better year’ in 2023: Analyst

Constellation Research Principal Analyst and Founder R “Ray” Wang sits down with Yahoo Finance Live to talk about the outlook for tech stocks ahead of the new year, Tesla's challenges and opportunities going forward, and the ongoing chip glut.

Video Transcript

JARED BLIKRE: A grim year for tech, no doubt, but our next guest thinks greener pastures lie ahead. Joining us now is Constellation Research principal analyst and founder Ray Wang. Ray, thank you for joining us here. Let's start with some of your calls on the mega caps because they're up today. We're having a nice day, but they've been absolutely brutally sold this year. Amazon actually exceeding to the downside its pandemic low from 2020. Your thoughts on some of the giants here.

RAY WANG: You're right. We've been hammered. It's been a bad year. Allie set the stage correctly, right? The era of easy money is over. Inverted yield curves are real. It's the worst IPO year ever. However, I actually think it's going to be a better year in 2023. And that's why these calls, right? For example, right, let's take some of the Matana stocks that we talk about. Apple was in a good position in the long run. They've got great services. China is going to reopen. The economy will get better probably in the second half, right? The cloud vendors are doing great, right?

You think about what's going on with Alphabet, right, and Amazon and Microsoft. These companies all have amazing, amazing residuals that are in cloud, right? These are three to five-year deals in the cloud for Fortune 500 companies that are in the hundreds of millions of dollars, right? These are also pretty strong.

And then of course, right, we're looking at Tesla. Tesla has been battered so much to the point where even Cathie Wood jumped in with a couple million dollar purchase today. But it's more than just a car company. It's about electrification. It's about the future of autonomous vehicles and driving. It's about energy management. There are other business aspects of Tesla that are there.

And then of course, we love the enterprise tech stocks. If you look at an Adobe or a ServiceNow, or if you look at Workday, and if you look at these companies, they are doing really well going forward because they've got also long-term enterprise tech contracts. And so the theme really is these companies are still growing. They're profitable. Their earnings are growing in the 20% to 30% range. Their profitability, especially for Sas and cloud companies, can be as high as 90%. They're really strong buys.

SEANA SMITH: Ray, let's talk about Tesla because today's jump, yes, obviously, it's an outperformer here. We're looking at the best day since July, but certainly has been under tremendous amount of pressure for 2022. When you take into account some of those challenges that lie ahead, you have the Twitter distraction, you have demand worries, just in terms of some of the incentives, the price reductions that they're offering US customers before the end of the year. Also some concern about what's happening with its plant in Shanghai production there. I guess how long do you see some of those risks lasting until we start to see this momentum really start to shift at Tesla?

RAY WANG: Seana, you're right. It's the worst month, worst quarter, worst year ever for Tesla stock. And that also means when you buy low, sell high, you have a great opportunity. For Tesla, it's probably six months out. Here's why. The incentives, they're gone on the US side that you're talking about, the incentives in China and at the end of this month. But China is coming back. It's the world's largest EV market. They're placed well there with their Shanghai plant.

And then of course, Tesla has about a three-year lead on everybody else right now. And if you look at sales, people still want Teslas over other EVs, and it's a lot to do with the charging network. If you get range anxiety, you're going to want to be next to a supercharger and be able to charge. And that isn't as easy for some of the other EV manufacturers.

JARED BLIKRE: Ray, I want to talk about semiconductors and direct everybody's attention to the YFi Interactive, where I have our semiconductor heat map covering the month today. So December not looking very good, except for Broadcom. That's the green space at the top, up 1%. But for the most part, lots of red there. And of course, chips are a very cyclical sector. I would point out that quarter to date, we're still holding on to some nice gains. So it looks like October, November were green months. But just in general, how is the cyclicality of the chip sector playing out? And what do you expect for the new year?

RAY WANG: Yeah, so what we're seeing is a chip glut on DRAM chips and memory chips, but we're also seeing some opportunities for companies like Broadcom, which is diversified into software. They have the VMware deal that's been there. They've done a good job with some of the other acquisitions in terms of building a software empire. And then of course, TSMC. They've got the $40 billion investment in two plants in the US. They're about to kick off their 3 nanometer chips. And that's going to be a game changer in the marketplace. And so there's still a lot of goodness on the chips side, but stay out of the DRAM and the memory side.

SEANA SMITH: Yeah, and Ray, to that point here, because there was a story in the Journal earlier this week, talking about the chip glut, and that a lot of that had to do with the fact that consumers are shifting their buying habits. They're simply not spending or buying as many consumer electronics as they had been over the past couple of years. How do you see the overall landscape in the midst of that weakening demand?

RAY WANG: Well, the weakening demand on the consumer chipset is real at the moment. However, the experiences that are going to power the future are all in the cloud and all in the internet. And by doing that, you're going to need more data centers. So the demand on data centers is still going to be huge.

And if we do get to some of the Metaverse aspirations that people believe we're going to head towards, right, or if we get to the continued adoption of just even the basic cloud and the [INAUDIBLE] cloud adoption, there's still a huge demand for chips and compute power. And that's why there's an advantage there. And of course, with AI growing, you're going to see more and more use of chips.

JARED BLIKRE: All right, we're going to have to leave it there. Lots of great information. Ray Wang, thank you.