The tech-laden Nasdaq Composite Index declined 1.8 percent last Friday after Goldman Sachs warned of a “valuation air-pocket” in five leading tech stocks dubbed as FAAMG (Facebook, Amazon, Apple, Microsoft and Alphabet).
The Goldman report says the FAAMG’s outperformance has created “positioning extremes, factor crowding and difficult-to-decipher risk narratives”.
It sounds strange that Goldman refers to FAAMG, instead of the FAANG that we usually talk about, in which “N” stands for Netflix, with its lofty PE ratio.
My fund holds shares of those five tech stocks, and I remain optimistic about the long-term outlook of FAAMG, even though they may experience short-term corrections.
However, the bigger story in my view is SWANNS, which stands for SoftBank, Western Digital, Alibaba, Nintendo, Nvidia and Samsung. Trading at much lower valuation multiples, I believe SWANNS stocks would offer a great buying opportunity if a correction in the sector drags them lower.
Let’s begin with Alibaba. In its latest announcement, the company gave a guidance for about 50 percent growth in revenue in fiscal year 2018. With its ecosystem based on data technology taking shape, the company continues to widen its economic “moat”.
Alibaba’s rise has also lifted its shareholder, SoftBank. The firm’s holding company discount remains huge; the market value of its holdings in Alibaba exceeds that of the firm. Any significant progress in the T-Mobile-Sprint merger would also boost SoftBank’s share price.
Nintendo’s stock revived following the Pokémon GO mania last year, reaching around 30,000 yen (US$272.63) per share. Recently the Japanese console maker launched Nintendo Switch, which proved to be another great success.
Nintendo nearly doubled its sales target for Switch to 18 million units for the fiscal year. On top of that, its impressive hardware sales would spur the lucrative software. Tokyo stocks have been constrained by a strong yen in the first half of 2017. Considering the healthy growth in profits of Japanese firms, their stocks should perform better on yen’s retreat in the second half of 2017.
For Nvidia, I found it hard to decide whether to count the stock as part of the worrisome FAANG or of the SWANNS. The stock price of the graphics chip maker slightly retreated last Friday, after a 50 percent leap on its first-quarter results.
The one-year forward PE ratio on Nvidia has reached 35, drawing attention from Citron Research. The notorious short-seller said Nvidia has become a “casino stock”, but it did not raise questions about the firm’s financials. Instead, Citron admitted that Nvidia is a good company.
Nvidia’s gaming GPU (graphic processing unit) business constitutes 60 percent of the firm’s revenue, growing 15 to 20 percent annually.
But the “sexy business” lies in its data center, which other tech companies use to help execute artificial intelligence and deep-learning tasks. That accounts for 20 percent of the revenue as of now; it is expected to achieve a 10-fold increase in three years.
There are growing signs that Western Digital, collaborating with INCJ, is likely to be the winner in the bidding for Toshiba’s NAND flash memory division. If Western Digital succeeds, its stock could jump by 30 to 50 percent.
Last but not least, my personal favorite: Samsung. While Toshiba’s NAND unit has attracted interest from several firms, Samsung owns a leading memory chip business, which grabs almost half of the market share.
Samsung’s stock has remained at its recent high with a short-term consolidation, trading at a PE ratio of barely eight times. The potential catalyst for the firm can be the closing of Toshiba’s bidding, or a remarkable result for the coming second quarter.
This article appeared in the Hong Kong Economic Journal on June 13
Translation by Ben Ng
[Chinese version 中文版]
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