The tech-heavy Nasdaq Composite ($NASX) plunged into correction territory last week, and is now eyeing a bear market as the sell-off deepens. While the tech rout has erased billions of dollars of wealth for investors, I believe that Alphabet (GOOG) and Amazon (AMZN) are two tech companies that investors can start buying at these levels. Both stocks are rated as a “Strong Buy” by sell-side analysts, and are good buys for long-term investors given their relatively cheap valuations.
To be sure, the tech sell-off is a welcome break for those seeking buying opportunities, as these names had seen an almost vertical up move after the 2022 crash. There were signs of valuation discomfort in many companies, including Nvidia (NVDA). The price action after the recent Q2 earnings showed that markets expect a lot more than an “earnings beat” from tech companies, and most failed to meet those high expectations - which for clarity, is not the same as the usual earnings estimates, which happen to be mostly conservative.
Why Did Alphabet Stock Fall After Q2 Earnings?
Alphabet’s Q2 revenues and earnings per share (EPS) were ahead of Street estimates. The company’s cloud revenues were also higher than what analysts were expecting, and the segment posted quarterly revenues of $10 billion and an operating profit of $1 billion for the first time.
However, YouTube revenues were slightly below estimates, which apparently led to the sell-off after earnings.
I believe the intermittent concerns over YouTube are unfounded, as the platform will stand to benefit from continued cord-cutting and the shift of ad dollars from linear TV to platforms like YouTube and Netflix (NFLX). YouTube has been the most watched streaming platform on U.S. TV screens for 17 consecutive months, according to data from Nielsen. Incidentally, Netflix - which otherwise competes with streamers like Disney (DIS) - talked about YouTube quite prominently during the Q2 earnings call.
GOOG Stock Forecast
Of the 44 analysts covering GOOG stock, 34 rate it as a “Strong Buy” and 3 as a “Moderate Buy.” Seven analysts rate the stock as a “Hold” or some equivalent. Its mean target price is $202.76, which is over 20% higher than last week’s closing price.
To be sure, Alphabet faces several headwinds, including from OpenAI, which is trying to eat away at its dominant share in the online search market with SearchGPT. Global digital ad spending could also be hit if macroeconomic sentiments worsen. However, at a next 12-month (NTM) price-to-earnings (PE) of 20.8x, the stock’s risk-reward is looking favorable.
Notably, while most tech stocks are trading at a significant premium to their historical multiples, GOOG is among those rare names that do not look bloated, and the valuations are a discount to their 5-year average.
Amazon Stock Also Trades Below Historical Averages
Amazon also trades at a discount to its long-term averages, and its current NTM PE of 32.5x is perhaps the cheapest it has ever been. To be sure, the company is no longer the kind of topline growth juggernaut that it used to be. However, its revenues are still expected to grow in double digits in 2024 and 2025, with profit growth projected to far exceed sales growth.
Moreover, Amazon's belt-tightening is showing results in its bottom line and cash flows. The e-commerce giant reported free cash flows (adjusted for equipment finance leases) of $51.4 billion in the trailing 12 months.
Analysts Weren't Too Bothered by the Crash in AMZN Stock
Amazon shares crashed on Friday after the company missed Q2 revenue estimates and provided soft guidance for Q3. Wall Street analysts – many of whom have listed AMZN as a top idea for 2024 – were not too perturbed by the topline miss and maintained their bullish bet on the stock.
Deutsche Bank’s Lee Horowitz is among those who advise buying the dip in Amazon stock. “We believe current levels represent a compelling entry point in our view for one of the better earnings growth stories in large-cap tech,” said Horowitz in his note.
I would agree with Horowitz’s assertion, and believe that Amazon brings a good combination of topline and bottom-line growth to the table. The valuations look quite reasonable, and along with Alphabet, it is one name that should be on the shopping lists of growth investors amid the sell-off in tech stocks. However, I would not go overboard with buying amid the macro weakness, and take a staggered approach to adding shares.
On the date of publication, Mohit Oberoi had a position in: AMZN , GOOG , NVDA , DIS . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
