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Technology Stocks Rebound in First Quarter

Technology snapped back nicely in early 2019 with some optimism that the US and China can reach trade agreements 

Brian Colello, CPA 5 April, 2019 | 9:03AM

Semiconductor technology

The Morningstar Global Technology Index is up 16% year to date in 2019 and outperformed the global equity market, which rose 11% over the same period. Technology snapped back nicely in early 2019 with some optimism that the US and China can reach trade agreements and avoid a full-blown trade war, an issue that caused the markets and the tech sector to fall in the fourth quarter. We continue to believe that tariffs and/or the lack of a trade deal may weigh on the health of the Chinese consumer and disrupt a highly interwoven tech supply chain that would be quite difficult for the US and China to unwind.

The median technology stock is roughly 2% below our fair value estimate today compared with a 15% discount toward the end of the fourth quarter. Despite the recent rally in tech and in semiconductors specifically, we still think semis are the most undervalued subsector in technology, as about 30% of our coverage is 4-star-rated or higher and the median chip stock is about 4% below our fair value estimate. Online media is also an attractive segment, as the median online media stock within our global coverage is about 12% undervalued.

Admittedly, the near-term picture in semiconductors is relatively weak after a couple of years of tremendous growth. However, a good portion of the bounceback in semis in the first quarter came from optimism about easing trade tensions between the US and China, as well as some commentary suggesting that the March quarter will be a bottom for chip demand. Although we're not expecting strong car sales in 2019, we foresee no slowdown in demand for more processing power, connectivity, and sensing capabilities in a wide variety of cars in order to enable more advanced infotainment and active safety applications, all of which bodes well for long-term chip demand.

Online media stocks are also cheap. In the US, bellwethers like Google parent company Alphabet (GOOGL) and Facebook (FB) face data privacy issues, while concerns about the health of the Chinese consumer have made regional champions like Baidu undervalued as well. Ultimately, we still foresee tremendous growth in global digital advertising in the years ahead, outpacing growth in TV and other media vehicles.

We believe that Baidu (BIDU) is an undervalued, wide-moat name, ie. it has a strong competitive advantage. Although weaker economic growth in China remains a concern, Baidu is still the largest Internet search engine in China and has built an ecosystem around search and shifted to mobile Internet by releasing various well-received mobile apps, such as Mobile Baidu Search and Baidu Map. Baidu has been evolving from a mobile-first to an artificial-intelligence-first company. In the near term, margins will remain under pressure because of aggressive content spending and talent acquisition costs for AI personnel, but we foresee strong revenue growth for the company thereafter.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Alphabet Inc A1,229.62 USD-0.74
Baidu Inc ADR105.10 USD-2.48
Facebook Inc A189.88 USD-0.14

About Author

Brian Colello, CPA  is a senior stock analyst with Morningstar.

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