3 Smaller Tech Stocks To Buy As Focus Shifts From Megacaps

3 Smaller Tech Stocks to Buy as Focus Shifts from Megacaps

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The macro landscape shifted dramatically since the March 2020 stock market crash. Magnificent Seven stocks became a hybrid growth hedge after the Fed’s unprecedented intervention to flood the economy with money, rampant inflation, and the resultant hiking cycle.

Holding these stocks, Roundhill’s Magnificent Seven ETF (MAGS) returned 10% year-to-date, vs the broader S&P 500 (SPX) market index at 5.2%. Yet, Big Tech’s unrelenting gains could end this year.

According to Monday’s UBS Global Research report, Big 6 Tech (excluding TSLA) stocks’ earnings per share could decline from the forecasted 42.2% this year to 15.5% by Q1 2025. The report noted that this would not come from puncturing the AI hype balloon, but due to “difficult comps and cyclical forces”.

On the upside, the report noted that neglected tech stocks could see tailwinds, from 11.1% to nearly 26% EPS gains by Q1 2025. The question is, which tech stocks should be selected as the Big Tech group cools down?

Advanced Micro Devices (Nasdaq: AMD)

Compared to Nvidia, AMD stock gained 66% over one year vs. NVDA’s massive 188% boost. Year-to-date, however, it is clear that investors neglected AMD, as the stock returned 1.8% vs. 58%, respectively. From its 52-week low price of $81.02, AMD shares are now 44% above at $146.64 per share.

While this is still impressive, AMD has yet to capitalize on its own AI chip rollouts. Countering Nvidia’s H100 in performance and cost-effectiveness, AMD’s MI300 is poised to significantly increase the company’s market share as it supplies the burgeoning AI infrastructure.

According to Piper Sandler analyst Harsh V. Kumar, the price-to-performance ratio of the new chips could boost AMD’s market share by up to 30%. Historically, AMD has followed this strategy, sharing a duopoly for GPUs with Nvidia and a duopoly for CPUs with Intel.

Per Nasdaq’s aggregated data, the average AMD price target is now $203.23 vs the current $146.64 per share. Interestingly, the low estimate at $140 is close to the present price level.

Tencent Holding (OTC: TCEHY) – ADR stock

For investors confident that US-China tensions will fizzle out due to interlinked economies, Tencent provides solid exposure to China’s mature gaming, payment processing, e-commerce, logistics, cloud computing, and social media sectors.  

For the full year 2023, Tencent reported a 34% YoY operating profit increase and profit attributable to shareholders up by 36% YoY, delivering total revenue of $86 billion. This is a 10% uptick from 2022. Considering that China has a larger market, with Tencent holdings spread across the US as well, such as Epic Games, Riot Games, it is safe to say that TCEHY is a growth blue chip stock.

Tencent’s yearly low stock price is $34.51 vs the current $40.80 per TCEHY share. Wall Street Journal’s price target for TCEHY stock is $52.49 per share, potentially giving investors a 28.6% return twelve months ahead. On the downside, WSJ’s low estimate is only $36.82 per share.

Shopify Inc. (Nasdaq: SHOP)

Year-to-date, this e-commerce/fintech company is down 8.5% while still up 31% from its 52-week low of $45.50 per share. Compared to a massive unrealized loss of $3 billion in 2022, Shopify turned around its fortunes with reported $1.4 billion unrealized gains for 2023.

Likewise, Shopify’s yearly subscription revenue grew 23% to $1.8 billion. Most tellingly, the e-commerce pioneer increased free cash flow significantly, from negative $186 million the year before $905 million. For the 2024 outlook, the company expects continued double-digit growth in the low twenties percentage rate.

Given that Shopify relies on online shopping as its core business model and e-commerce is forecasted to grow at 15.80% CAGR (2024-2029), this puts Shopify on a solid appreciation path. Per Nasdaq’s aggregated data, the average SHOP price target is $82.07 vs. the current $70.03 per share. The low estimate is close following this YTD decline, at $63 per share.

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Disclosure: None.

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