With the Magnificent Seven controlling nearly 30% of the S&P 500's value, the tech sector may feel crowded. But there are other value-based technology stocks that investors may be overlooking.
Corey Johnson, chief market strategist at Futurum Group, and Doug Clinton, managing partner at Deepwater Asset Management, join Yahoo Finance to discuss hidden gem stocks in the technology industry.
Johnson explains that investors may need to reframe their investments in technology beyond growth. “We view technology as growth, and certainly a lot of unprofitable technology companies are hard to value as value stocks, but I think a lot of them have turned around.” We've seen that the king of investors, Warren Buffett, owns a huge stake in Apple (AAPL), but this idea that technology can't be valued is completely wrong, and the time is right. Investors should consider: They need to understand what they are investing for, what kind of return they will get, when they need it and whether it is worth the long wait. ”
Clinton emphasizes that it may be important to look downstream from the tech giants. He noted that SK Hynix (000660.KS) is a technology provider to Nvidia, saying, “Nvidia uses Hynix's high-bandwidth memory in its chips, which is currently only available in hyperscalers. As a company building AI infrastructure, Hynix, a holding in our Deepwater Frontier Tech Index, is a member of the Loop ETF (LOUP). We believe that Hynix is a potential beneficiary of continued demand for Nvidia chips. ”
For more expert insights and the latest market trends, click here to watch the full episode of Yahoo Finance Live.
Editor's note: This article was written by Nicholas Jacobino
video transcript
[AUDIO LOGO]
Julie Hyman: With just over 10 minutes left until Wall Street's closing bell, we're looking at how to navigate the big picture using the Yahoo Finance Playbook. Well, it's mainly the big companies like Nvidia and Meta that are making headlines with record profits. We take a closer look at where and why investors can find value in the tech sector.
Joining us now are Doug Clinton, Managing Partner at Deepwater Asset Management, and Corey Johnson, Chief Market Strategist at Futurum Group. Thank you everyone for being here. Corey, I want to start with you. Because we usually think of growth and value as, in some ways, opposites. But when does it make sense for investors to seek value in technology, which has traditionally been a kind of growth area?
Corey Johnson: Well, I guess so. That is, the names of these types have classical definitions. And historically, we haven't seen technology as growth. And in fact, many unprofitable tech companies are difficult to value as value stocks. But I think a lot has changed over time.
And we've seen that the king of value investors, Warren Buffett, has a huge stake in Apple, but this idea that technology can't be valuable is simply wrong. Masu. And there's also timing. And then investors have to think about what they are investing for, what kind of return they will get, and when they need it. And it's about figuring out whether it's worth waiting longer, whether there are things you want to be more speculative about, what the timing of those investments is, and what the market favors at the time.
Sometimes the market favors value stocks. And sometimes the market doesn't like it.
Josh Lipton: Doug, I'd like to take you here too. I'm honoured to be able to meet you. Doug, you find it difficult to find deep value in technology. But you have us some names. One is SK Hynix. Why is the name Doug appropriate here?
Doug Clinton: Josh, if you rewind the clock a year, Nvidia probably wasn't the biggest value in technology. In hindsight, this may have been the best time for value stocks of last year. Because if you had a crystal ball, the stock would probably have been trading at less than 10 times forward earnings at some point. Business is growing very quickly.
Regarding Hynix, Hynix is Nvidia's memory supplier. So Nvidia is using his Hynix's high-bandwidth memory in its chips, which is now used not only by hyperscalers, but also potentially by sovereign nations and others building AI infrastructure. There is great demand from industrial companies. So you can see that Hynix, a holding in our Deepwater Frontier Technology Index, is the driving force behind the Loop ETF. We think Hynix is a potential beneficiary of these continued demand for his Nvidia chips.
Julie Hyman: Doug, I'd love to hear your take on something like SK Hynix, but as you know, semiconductors have traditionally been a commodity business, especially memory chips. Do you think the AI cycle will smooth that out and make business less commoditized?
Doug Clinton: I think so in the medium term. So this answer has some nuance. I think the AI cycle we're in right now is likely to last longer than many other cycles we've seen. I think it's going to be a very long journey building the infrastructure to support AI. Because at the moment, the functionality and intelligence of AI models is completely dependent on electricity and chips.
So as long as that holds true for these models, and I think it will hold true for the next few years, we have to continue to build data centers that house thousands of these chips. Also, memory has become a bit of a commodity in the past, but there are actually only three major memory vendors. Hynix, Micron, and Samsung. And I think Hynix is at the forefront of very aggressive development of new memory products. That's why I think they will maintain their lead.
Josh Lipton: Doug, one more quick question: Do you think SK Hynix is better than its biggest rival, Micron?
Doug Clinton: I think it's okay to own both. This is where the real challenge lies, and where it gets tricky for U.S. investors. Hynix is a Korean listed stock, so it's a little difficult to access. You can't access it with the Loop ETF, which I mentioned a little earlier. In Micron's case, it's clearly a U.S.-listed stock. If you just want to play broadly with memory and want direct exposure, Micron is easier.
Julie Hyman: So, Corey, I'll take it to you and look at what you're seeing here in terms of what we're talking about here, which is like the parameters of the value of this market. Let's.
Corey Johnson: Well, that's someone's idea, right? In other words, DRAM is DRAM. And DRAM manufacturers have always told us that their DRAMs are special. And the market has always said otherwise. And what we really know is that DRAM prices are very volatile, whether it's Samsung, Hynix, or Micron. Because DRAM is easier to replace than CPU. Graphics processors are very difficult to replace. That's why we're seeing such impressive revenue growth for NVIDIA.
From a Doug values perspective, I'm blaming myself for not owning NVIDIA in my personal account or portfolio. Still, I watched it the other morning. And while my biggest stock holding over the years has been Comfort Systems, it's not a recommended stock. But, and this is just an observation, I was trying to stop myself from kicking myself and was looking at this company, Comfort Systems. That's air conditioning equipment repair, right? Nothing is more appealing or more “worthy” than this concept of fixing your HVAC. Still, his 3-year performance is about the same as his NVIDIA performance.
So what I'm saying is that this market is actually a little bit kinder to value investors than it has been in the last few years, and it's really differentiating between winners and losers within and outside of technology. If you just look at today, yeah, look at how well CrowdStrike stock is doing compared to what's going on with Palo Alto Networks. Palo Alto Networks announced a few weeks ago and told us that they were looking at — was it a week ago? Time flies and they're seeing customer fatigue. There was a report. Despite this, we see CrowdStrike actively reaching out to the same types of customers who say they're happy to buy from them.
This suggests that companies perform differently and the market can determine the winners and losers. Stock-picking markets are a necessary component of value stock performance. And what we're seeing now is, yeah, while the S&P 500 and the Nasdaq and beyond are at or near all-time highs, what we're seeing is that the market is actually It means that we are distinguishing the winners. And the losers. And NVIDIA is a great winner, and to Doug's point, it's still much more affordable at his PEG ratio, price-to-earnings growth rate, than many other companies in the same sector.
Josh Lipton: And Doug, I'll bring it to you and get you out of here on this. I'm going to change gears here, Doug, because I'm really interested in your answer. Doug, your company owns Alphabet. And listen, there are stocks in the red so far this year, Doug. There are real criticisms of the company, and you've probably heard them. When it comes to AI, we're not moving fast enough. As a shareholder, Doug, do you share that concern?
Doug Clinton: Josh, we are very frustrated with the speed at which AI is being developed. Google, Alphabet — they have all the tools, all the components they need to be a true runaway leader in AI. They have the data. they have a team. It is distributed through products such as Android and Chrome. They just don't have the pace that OpenAI does.
And that's what we see when startups like OpenAI disrupt incumbents. And that's a concern for us. They still have all those materials. That's why we haven't sold any shares yet and are still optimistic. However, shareholders remained dissatisfied. And I'm sure you're hearing more about that too.
Ultimately, I think the company needs to make a statement, take action, and have some kind of almost meta-moment where a year ago we moved into a year of efficiency. To get these assets up and running, they need something to reignite the fire.
