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During the first six months of the year, the tech sector ripped higher, recovering from a lackluster 2022 performance as enthusiasm over widespread artificial intelligence (AI) adoption helped to revive investors' risk appetites. More recently, however, an uptick in economic uncertainties - punctuated by high-profile downgrades from Fitch and Moody's, along with a lackluster sales forecast from sector heavyweight Apple (AAPL) - has paused the breakout rally that characterized the first half of 2023.
However, there may still be some significant upside left in the mega-cap tech stocks, based on analysts' forecasts for the group - which means any pullbacks could be a buying opportunity for investors. Here's a look at three big tech stocks that Wall Street is expecting to rally 20% or more from current levels.
Alibaba
First on our list is Chinese internet giant Alibaba (BABA). The company has interests in e-commerce, financial services, retail, digital media, entertainment and cloud computing, and is a cultural behemoth in China. Outside the mainland, the company has operations in 13 other countries, including Australia, Brazil, and Japan. The Jack Ma-founded company currently commands a market cap of $239 billion.
Alibaba started FY 2024 on a strong note, with both revenue and earnings surpassing the estimates of the Street. Revenues for the April-June quarter rose 14% year-over-year to $32.3 billion, topping the consensus estimate of $31.02 billion as all major business segments recorded growth. Further, net income attributable to shareholders improved 51% to $4.7 billion, compared to the consensus estimate of $3.9 billion.
The company’s earnings have consistently exceeded analysts' estimates in all of the previous five quarters. Alibaba has reported earnings growth in four out of those five quarters, with revenue increasing only two out of the past four quarters.
The company's U.S. shares are currently trading at a forward p/e of 10.75, which is lower than the industry average of 15.92. However, the price/sales (p/s) ratio of 1.94 is higher than the industry average of 0.90. In terms of price/cash flow (p/cf), BABA's ratio of 8.98 is right on target with the industry mean of 8.88.
The stock has been quiet so far in 2023, rising just 3% year-to-date.
Much of this lackluster performance is due to a weakening Chinese economy. However, analysts remain bullish on BABA.
The consensus rating for BABA is a “Strong Buy,” with a mean target price of $142.87, indicating expected upside of more than 55% from current levels. Out of 14 analysts covering the stock, 12 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, and 1 has a “Hold” rating.
Advanced Micro Devices
Shares of chipmakers have been on a tear in 2023, supported by expectations for rising AI demand, and Advanced Micro Devices (AMD) has been no exception. AMD stock is up 70% YTD, considerably outpacing a 30% rise for the Nasdaq Composite ($NASX).
However, AMD has pulled back since reporting second-quarter results. The chipmaker, valued at $180 billion, reported an 18% year-over-year drop in revenues to $5.36 billion, while EPS fell 45% to $0.58. The slowdown in revenues can be attributed to sharp declines in key segments such as Client (down 53.6% YoY), Data Center (down 11.1% YoY), and Gaming (down 4.5% YoY). AMD's quarterly results managed to edge past the consensus estimates, though its third-quarter forecast was softer than anticipated.
AMD's earnings have surpassed consensus expectations in four out of the past five quarters, a time period during which the chip specialist has consistently reported lower earnings. Revenues have also been flat to lower in the past four quarters.
In terms of valuation, AMD appears a little stretched by some measures. The stock is trading at a forward p/e of 39.09 - much higher than the sector average of 23.03 - and a p/s of 7.36 (sector average of 2.72), though its p/cf is in line at 19.41 (sector average of 20.53).
However, analysts remain optimistic about the prospects for AMD - and specifically, its future prospects in the rapidly expanding AI space. The stock has earned a consensus “Strong Buy” rating from analysts, with a mean target price of $141.03 - indicating expected upside potential of nearly 28% from current levels.
Out of 28 analysts covering the stock, 21 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating and 6 have a “Hold” rating.
Taiwan Semiconductor
We round out the list with another chipmaker - and not any ordinary chipmaker, but one of the largest in the world in terms of revenue. We are talking about Taiwan Semiconductor (TSM), which makes chips for none other than trillion-dollar AI market leader Nvidia (NVDA).
From a technical perspective, shares of the $482 billion chipmaking behemoth are up 23% YTD, underperforming the broader Nasdaq.
Like AMD, shares of TSM have pulled back following its second-quarter results. The chipmaker reported consolidated revenues of $15.68 billion, down 13.7% from the prior year, while net income fell 23.3% to NT$181.8 billion. Even though both metrics came in above the expectations of Wall Street, investors were rattled by the tech giant's first profit decline in four years.
Moreover, Taiwan Semi cited adverse global economic conditions for the decline in revenues, and warned of “continued inventory adjustment” from customers. The company expects revenue to recover in the third quarter, ranging between US$16.7 billion and US$17.5 billion.
TSM has a history of surpassing analysts' expectations. EPS topped consensus expectations in each of the past five quarters, supported by fairly consistent year-over-year growth.
On a forward p/e basis, TSM is trading at 18.60 - lower than the industry average of 23.03 - while on a p/cf basis, TSM's ratio of 10.18 also compares favorably to the sector average of 20.53. However, TSM's p/s ratio of 6.71 is somewhat rich, compared to the sector average of 2.72.
Overall, analysts are positive about TSM's prospects. Wall Street has handed out a “Strong Buy” rating on the stock with a mean target price of $115, indicating expected upside potential of about 25% from current levels. Out of 6 analysts covering the stock, 4 have a “Strong Buy”, 1 has a “Moderate Buy,” and 1 has a “Hold” rating.
