Time to Buy Giant Tech Stocks at a Discount?

Benjamin Rains
·8-min read

The Nasdaq closed at all-time highs only two weeks ago, as Wall Street celebrated stronger-than-expected earnings results and the likelihood of more government spending. But things changed quickly. The tech-heavy index tumbled 3.5% during regular trading Thursday to extend a rough two weeks that put it 7.5% below its Feb. 12 records.

The last week of February has seen investors sell tech stocks across the board as Treasury yields climbed to pre-pandemic levels at high speed. For instance, the 10-year U.S. Treasury yield surged from 0.90% at the start of 2021 to over 1.50% on Thursday. The tech and bond selling comes as inflation concerns rise, driven by increased government spending and the increased possibility of a big economic rebound later this year after a successful vaccine rollout.

The rising Treasury yields highlight the somewhat stretched valuations of tech stocks and make the S&P 500’s dividend yield look less appetizing. And the Wilshire 5000 Index—the so-called total stock market—stands at roughly $41 trillion, up from $36 trillion before the November election. This puts it at about 195% of U.S. GDP, up from around 157% prior to the pandemic.

Another reason for the recent pullback is straightforward: investors are selling stocks that have soared over the last year, with the Nasdaq is still up 55% in the last 12 months despite the recent fall. Wall Street always takes profits periodically and then looks to reallocate cash.

Pullbacks and corrections are healthy and necessary parts of the market. The big players and many savvy investors often use these pullbacks as an opportunity to buy some of their favorite stocks at a discount.

Long-term investors might also want to avoid trying to time the market completely because calling the bottom is just as difficult as determining a top. The last year alone is a perfect example, as many investors likely missed the massive initial post selloff run that began in late March.

Therefore, investors with longer-term horizons should likely consider buying strong names at a discount, even if there is more near-term selling. Let’s not forget that the earnings outlook for 2021 continues to improve and many of the biggest tech companies still boast the impressive fundamentals they did two weeks ago, at cheaper prices.

We saw some buyers step in on Friday, but the Nasdaq gave up most of its gains right before the closing bell. The index finished the day up 0.56%.

Now let’s explore the two biggest companies by market cap to see if they might be worth buying at a discount…

Apple AAPL

Apple stock is down 10% in the last two weeks and nearly 17% from its late January records. The recent selling pushed AAPL below its 50-day moving average. The iPhone giant also slipped below 30, or the overbought threshold on the Relative Strength Index this week for the first time since the coronavirus selloff.

Traders noticed and bought Apple on Friday to push it back to 36 in terms of RSI. But the stock sold off heavily right at the end of the session to close regular hours up 0.22% at $121.26 a share, and see it slip back to oversold.

Even with the decline, Apple shares are still up around 75% in the past year. But they are now down 1% in the last six months to lag the tech sector’s 13% jump. The drop has also cooled off Apple’s valuation, with it now trading below its year-long median at 26.5X forward earnings. This marks a discount to the Zacks Tech Sector and a 33% discount to its highs during this stretch.

These are likely attractive levels to many potential Apple investors that are thinking about holding the world’s most valuable company for years to come. Apple also reported blowout quarterly results at the end of January. It topped our Q1 FY21 EPS estimate by 20% and grew its revenue by 21% to $111.4 billion—8% above our estimate.

The iPhone 12, its first 5G-capable offering, got off to a great start, with iPhone revenue up 17% last quarter to account for roughly 60% of total sales. Meanwhile, iPad and Mac sales surged 42% and 23%, respectively, with its Apple Watch and AirPods-heavy wearables unit up 29%.

CEO Tim Cook and Apple are on a mission to make consistent revenue streams from its device users, which is why it has Netflix NFLX and Spotify SPOT competitors, as well as news services, its massive app store, and much more. The most valuable brand in the world closed last quarter with over 620 million paid subscriptions, up 140 million from last year.

Apple is also working to design more of its chips in-house and it plans to introduce more privacy features on the iPhone as it calls out Facebook FB and others. There are even reports that it plans to one day enter the booming EV market alongside Tesla TSLA.

Zacks estimates call for AAPL’s FY21 revenue to surge 23% to reach $336.8 billion. This would represent its best top-line growth since 2015 and help lift its adjusted earnings by 36%. Apple’s strong earnings revisions help it earn a Zacks Rank #1 (Strong Buy) right now, alongside an “A” grade for Growth in our Style Scores system.

If investors aren’t impressed enough with its growth and continued opportunities in a world where people are glued to their smartphones and devices, Apple is sitting on $84 billion in net cash. And it will keep on buying back stock and paying dividends as it tries to reach “a net cash neutral position over time.” At the moment, 18 of the 25 broker recommendations that Zacks has for Apple come in at a “Strong Buy,” with none below a “Hold.”

Microsoft MSFT

Microsoft stock was not hit as hard as Apple during the recent selloff. The historic tech giant traded about 7% below its mid-February highs at the close on Thursday. It then jumped 1.5% on Friday to close regular trading at around $232 per share, as it bounced off its 50-day moving average. Like AAPL, MSFT has lagged the tech sector recently, up 4% in the trailing six months vs. 13%. And it rests below neutral levels when it comes to RSI at 46.

In terms of valuation, Microsoft is trading at 29.5X forward 12-month earnings. This represents a 5% discount to its own year-long median and a 20% discount compared to the Computer Software-Services industry average. The recent jump in the 10-year U.S. Treasury has made its 0.90% dividend yield a bit less attractive, but it’s still solid considering MSFT shares have climbed 50% in the last year.

Last quarter, the company once again showcased the power of its diverse portfolio that is set to help it grow steadily for years, if not decades to come. MSFT’s Q2 FY21 revenue jumped 17% to blow by our 9% growth projection.

The company’s commercial cloud revenue surged 34% to $16.7 billion, or 39% of total sales. Its ability to expand its cloud business alongside Amazon AMZN and others during the last several years has transformed the tech icon’s outlook. And cloud computing should remain a growth business for Microsoft, as the world grows even more overrun with data.

Microsoft has never been more influential and diversified and cloud now plays a role across the entire company. This includes its Office offerings, its Xbox-heavy gaming unit, its remote work products that compete against Zoom ZM, and elsewhere. In fact, all three of its core businesses climbed by over 13% last quarter.

Analysts have also raised their earnings outlooks. Zacks estimates call for its full-year fiscal 2021 revenue to jump over 14% to reach $163.5 billion. MSFT’s FY22 sales are then projected to climb by another 10.5%. These estimates follow three years of between 13% to 15% sales growth. And its adjusted earnings are projected to climb 27% and 10%, respectively during this stretch.

Microsoft’s positive earnings revisions help the stock grab a Zacks Rank #2 (Buy) right now. Furthermore, 20 of the 22 brokerage recommendations Zacks has are “Strong Buys” with the other two at “Buys.”

The company closed its second quarter with $132 billion in cash and equivalents. This will help it keep buying companies, paying dividends, and repurchasing stock. MSFT returned $10 billion to shareholders via repurchases and dividends last quarter, up 18% from the year-ago period.

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