September 26, 2023


Sapiens Digital

3 Technology Stocks That Can Prosper During a Tech Downturn


The tech sector might look like a losing investment given the recent performance of many of its stocks. The Nasdaq is deep into bear territory, and the growth-oriented ARK Innovation ETF has lost about three-fourths of its value.

Nonetheless, other tech stocks have held up well, and technology investors seeking stability can still look to Alphabet (GOOGL 5.11%) (GOOG 5.20%), IBM (IBM 2.62%), and Qualcomm (QCOM 4.17%) to drive long-term returns.

1. Alphabet

Alphabet has not escaped the effects of the slowdown. The Google parent encompasses dozens of tech-related businesses, and its cash cow remains advertising. Amid economic contraction and rising inflation, the company has seen a slowing in digital ad growth, the segment that still makes up an overwhelming majority of the company’s revenue.

Despite this challenge, Alphabet continues to generate robust revenue growth. In the first quarter of 2022, the top line came in at $68 billion, 23% higher than the year-ago quarter. It also led to a net income decline of 8% during the period to $16.4 billion, due primarily to losses in equity securities. And revenue had grown by 41% in 2021, an indication of the aforementioned slowing.

Nonetheless, it seems to have found its next major revenue stream in Google Cloud. That cloud-computing services segment produced $5.8 billion in revenue, up 44% year over year. According to Synergy Research Group, it lags only Amazon and Microsoft in terms of cloud market share.

Cloud infrastructure market share.

Image source: Synergy Research Group.

Alphabet’s stock has lost about 30% since achieving its 52-week high last fall, but its $140 billion in liquidity makes it one of the most stable companies in America. Also, for all of its profit growth, its price-to-earnings (P/E) ratio has fallen to 20, a valuation low that’s lower than it has seen in nearly 10 years. This earnings multiple makes Alphabet a value stock, and it could become an even better buy as its headwinds abate over time.

2. IBM

Legacy IT businesses have long bogged down IBM. Over the last 10 years, as Big Blue freed itself from the outdated and less-profitable business operations, its stock has fallen by more than 25%.

But a long-awaited turnaround has likely begun. Arvind Krishna, the former head of the cloud and cognitive software segment, became CEO in 2020. Krishna played a key role in the 2019 acquisition of Red Hat and followed that up with over 25 additional acquisitions since becoming CEO. He also spun off Kyndryl, its former managed infrastructure business, to focus more heavily on the cloud. These moves have helped IBM achieve the fifth-largest cloud market share.

That transformation has helped improve its financials as it generated $14.2 billion in revenue in the first quarter, an 8% year-over-year increase. This included a 14% surge in hybrid cloud revenue, an offering that helps private and public clouds interact seamlessly.

In April, it also increased its annual dividend to $6.60 per share, the 27th straight increase. At a cash yield of 4.9%, this could make IBM the dividend stock of choice for cloud investors.

Moreover, when including that payout, IBM logged a negative 1% total return over the last year compared with a negative 7% for the S&P 500. Also, at a P/E of 22, it remains a relative bargain compared to Microsoft at 25 times earnings and Amazon at a 50 P/E. That lower valuation and its dividend could help IBM become a more prominent cloud stock.

3. Qualcomm

Qualcomm also prospers from a secular tech trend, 5G in this case. Data Bridge Market Research forecasts a 49% compound annual growth rate for the 5G chipset market through 2029. Since it leads the industry in developing 5G chips, this trend naturally benefits the company.

Qualcomm is not limiting its future to handsets. It also continues to innovate in the radio-frequency front end, automotive, and Internet of Things markets. Hence, if some functionality shifts away from smartphones, Qualcomm has prepared itself to evolve with the market.

In the first six months of fiscal 2022 (which ended March 27), it generated almost $21.9 billion in revenue, 35% more than in the same period of fiscal 2021. Since the company limited its expense growth, the net income of $6.3 billion during the first half of fiscal 2022 surged 50% higher compared with the same time frame in fiscal 2021.

Qualcomm has largely escaped the tech sell-off, gaining a 1% total return over the last 12 months. Still, the company’s most significant danger could be geopolitical, as it derived around two-thirds of its revenue from China in fiscal 2021. That could help explain why its P/E ratio is 13, far below the valuations of communication-chip designers such as NXP Semiconductors or Nvidia.

Nonetheless, the 5G upgrade cycle will continue despite economic headwinds. Moreover, with its diversification into new areas, Qualcomm stock looks like a buy now.


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