The spoils of 2018's tech rally certainly haven't been distributed equally.
On one hand, Internet and enterprise software high-flyers such as Netflix (NFLX) , Amazon.com (AMZN) (briefly reached a $1 trillion market cap today), Atlassian (TEAM) , Zendesk (ZEN) and Wayfair (W) have seen huge gains. A smattering of tech names operating in other industries, such as AMD AMD, Turtle Beach (HEAR) and NetApp (NTAP) , have also surged.
Tech giants such as Apple (AAPL) , Microsoft (MSFT) and (to a lesser extent) Alphabet/Google (GOOGL) have also done well, posting solid double-digit gains with the help of strong earnings reports. Among the proverbial Big Five tech companies, only Facebook (FB) , which is down 3% this year, has meaningfully underperformed the Nasdaq's 17% gain.
However, some parts of the tech sector have missed out on the fun, as investors worried about industry-specific and/or macro issues have chosen to head to the sidelines, or perhaps move their funds into some of the aforementioned high-flyers.
In some cases at least, this rotation looks excessive. Here's a look at three groups of tech companies that have lagged in 2018 and seen their valuations take a haircut, but which still have meaningful growth drivers. As always, investors are advised to do their own research on the companies discussed.
1. Chinese Tech Stocks
Trade tensions have weighed on this group. So has the dollar's recent gains against the renminbi, which serves to diminish the dollar-based revenue and profit growth of companies that record most of their revenue in renminbi. Broader weakness in emerging markets stocks hasn't helped either. And recently, a government crackdown on the local gaming industry has weighed on the shares of affected companies.
However, Chinese tech companies are still operating in a country seeing 6%-plus annual GDP growth and a swelling middle class, and whose mobile app and service ecosystems are in some ways more advanced than those of the United States. Trends such as e-commerce adoption, online-to-offline services growth and digital content consumption still have a lot of headroom.
Here are some 2018 Chinese tech laggards that could be worth a look:
Tencent (TCEHY) - The messaging, gaming and payments giant is down 19% in 2018.
JD.com (JD) - China's #2 e-commerce firm. Its shares are down 29% so far in 2018.
Weibo (WB) - Effectively the Twitter of China. Its shares are down 26%.
Ctrip.com (CTRP) - China's online travel leader is down 13% this year.
2. Chip Equipment Stocks
A mid-year slowdown in capital spending among memory makers -- it coincides with weakening NAND flash memory prices, and attempts by DRAM makers to keep a lid on capacity growth -- has weighed. More recently, a pause in spending among chip contract manufacturers has also taken a toll.
On the flip side, the industry should continue benefiting in the coming years from the semiconductor industry's growing capital-intensity, as upgrading newer logic and memory manufacturing processes demands more capex than older processes. Trends such as heavy cloud data center spending, automotive chip growth and solid-state drive (SSD) adoption should also act as tailwinds. And it's hard to ignore the fact that many chip equipment names now trade at low multiples.
Here are some 2018 chip equipment laggards that tech investors might want to take a look at.
(AMAT) - The chip equipment giant is down 17% this year after issuing disappointing guidance in its July quarter earnings report. In addition to chip wafer fab equipment (WFE) markets, Applied has strong exposure to the OLED manufacturing equipment market through its display equipment business.
Axcelis (ACLS) - This lesser-known semi equipment play is down 30% in 2018. It has strong exposure to both the DRAM and NAND markets.
Lam Research (LRCX) - Lam, now the world's second-biggest chip equipment firm, is down 7% this year. Earlier this year, the company set a goal of achieving $23 to $25 in EPS in fiscal 2021, which ends in June 2021.
3. Data Center and Wireless Tower REITs
These companies, which in some ways are real estate plays as much as they are tech plays, have been pressured a bit by worries about rising interest rates. That's because the companies have meaningful debt loads, and also because higher rates can make their dividend yields look less attractive relative to fixed-income investments.
However, for each group of companies, the catalysts for posting moderate sales and funds from operations (FFO) growth in the coming years remain firmly in place. For data center REITs, the catalysts include strong capex growth among cloud giants, as well as hybrid cloud and international data center investments among traditional enterprises. For wireless tower owners, 5G network build-outs, broader mobile data consumption growth and small cell base station adoption should act as growth drivers over the next few years.
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