After a volatile start to the year, many technology stocks have become markedly cheaper — and it's time to start scooping up shares, according to at least one analyst.
"We believe the tech sector is as oversold as we have seen in the last five years and we would strongly be buying cloud, software, cyber security, chips, and stalwart tech names led by FAANG with Apple our clear favorite," Wedbush analyst Dan Ives wrote in a note.
Technology stocks have endured a heavy period of selling so far in 2022 as investors rotated away from high-growth and richly valued shares in anticipation of higher interest rates and tighter financial conditions from the Federal Reserve.
The Nasdaq 100 (^NDX) sank to close in a bear market on Monday, ending more than 20% below its recent record high from Nov. 19. And each of the FAANG names — or Meta Platforms (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX) and Alphabet (GOOGL) — are down sharply for the year-to-date.
In a nutshell, we believe the tech sector is as oversold as we have seen in the last five years and we would strongly be buying cloud, software, cyber security, chips, and stalwart tech names here led by FAANG with Apple and Microsoft our clear favorite large caps.
— Dan Ives (@DivesTech) March 16, 2022
However, now that the Federal Reserve has rolled out its first interest rate hike since 2018 and telegraphed six additional rate hikes will likely take place this year, that shroud of uncertainty on the monetary policy outlook has been lifted for equities and for many tech names especially, Ives suggested.
"We strongly believe this is a bright green light to own oversold tech stocks as the market was fearing the worst from [Federal Reserve Chair Jerome] Powell & Co. and now ultimately the Fed 'ripped the band-aid' off for the world to see with the liftoff now under way," Ives said. "While there could be major volatility going forward, we believe the tech bottom is now likely in for the year."
However, not all tech names are created equal in this environment, and Ives still struck a cautious tone on the work-from-home (WFH) stocks that benefited from stay-in-place behaviors and ran up the most earlier in the pandemic. Names including Netflix, Peloton (PTON) and Zoom Video Communication (ZM) have far underperformed the broader market this year, with each dropping at least 34% for the year-to-date through Wednesday's close.
"Our recent enterprise checks coupled by healthy results are showing a digital transformation that is gaining more steam into 2022 (NOT slowing) and we believe investors have run for the exits and sold the tech sector indiscriminately across the board painting all tech names with the same brush," said Ives (emphasis his). "Herein represents why we believe tech stocks are bifurcated as the WFH/COVID pull forward names should be viewed very cautionary with valuations still moving lower, HOWEVER we view enterprise/cloud focused names as compelling table pounder buys at these levels."
Among the mega-cap technology stocks, Ives deemed Apple his top pick, noting he believed shares would rise back to $200 apiece this year as supply chain concerns eventually begin to ease. This would represent appreciation of 25% from Wednesday's closing levels.
"We view Apple as both a Rock of Gibraltar defensive tech name as well as the best 5G tech play in the market with a massive product cycle that is gaining more steam along with its valuable services business which is being undervalued by the Street in our opinion," Ives said.
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Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter
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