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Thursday, December 1, 2022

These 3 Mega Caps are Bear Market Buys

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Like the animal they imitate, bear markets is known for a long reach. When the bears take a swipe at high stock prices, few names survive.


MarketBeat.com – MarketBeat

This year’s bear market attack has spared few industries. High-flying tech companies have been hit particularly hard by the impact of rising interest rates on valuations and fears of a global economic slowdown.

Even mega-cap tech names have been dragged down by selling pressure. The good news is that the 2022 tech wreck has created attractive entry points for some of the world’s best-loved companies.

Not all bruised megacap tech stocks are buys, though. Some still have high valuations and significant challenges ahead.

In other cases, the contusion appears excessive and the chance of pounce is primed. The bear market has not been kind to these three megacaps, but the time has come for long-term investors to fight back.

Is Microsoft Stock a buy?

Microsoft Corporation (NASDAQ: MSFT) has a $100 discount – and we’re not talking about a new Office subscription. About that amount has been cut from the company’s stock price since its record $349 peak.

The sell-off, while partially justified after a massive run in 2021, coincided with year-over-year earnings growth and expectations for more of the same in the coming quarters. Last quarter, Microsoft surpassed consensus profit (as it usually does) thanks to solid contributions from all core segments: Office, Windows, Azure, LinkedIn and Gaming.

While management lowered its expectations for the fourth quarter due to unfavorable currency effects, another period of earnings growth is expected. When Microsoft reports results for the last quarter of its fiscal year next week, The Street expects earnings per share of $2.30, a growth of 6%. Not a huge finale, but one that would cap off a year of 20% earnings growth despite the challenging macro backdrop.

More importantly, Microsoft will likely once again show that its companies are doing well across the board. Regardless of how the short-term economic wind blows, companies will spend on software that drives cloud transformation, remote employee collaboration and business intelligence — plus the addition of Activision Blizzard should bolster the gaming division.

With a lagging profit of 27x, Microsoft is trading below the five-year average P/E of 33x. This is an unmissable bargain that won’t last long.

Why is Alphabet’s share price so low?

Alphabet Inc. (NASDAQ: GOOGL) is cheap for several reasons. First, the bear market decided that $3,000 was enough for now. Two, the company recently completed a 20-for-1 divide that has priced the stock in the more affordable $100 range. And three, the 21x stock’s P/E is well below both its own historical average (26x) and that of the interactive media and services industry (27x).

Like its mega-cap tech peers, the former Google has faced increased costs as it expands into new markets and emerging technologies. The relentless legal pressure it faces due to its dominant search position has also raised the stock’s risk profile in a market that has been risk-free for most of the year.

After a fantastic 2021, led by a pandemic ad demand, Alphabet will continue to face difficult compositions. The consensus estimate for earnings per share in 2022 points to little or no growth. But after hitting the reset button this year, the outlook for 2023 is brighter.

Analysts expect earnings growth of 18% next year. That’s because businesses of all shapes and sizes are expected to spend money on digital advertising in tandem with their transition to e-commerce. Despite numerous challengers, Google is still the place to be for online advertisers.

Meanwhile, a growing presence in the cloud market is reducing Alphabet’s reliance on search. Initiatives in the field of artificial intelligence, wearables, home automation and health should also lead to more balanced growth.

Is Amazon.com a buy for profit?

Amazon.com, Inc. (NASDAQ: AMZN) has also introduced a 20-for-1 split that has made the already discounted price even lower. The ecommerce king now trades around $120 and doesn’t look as mighty as usual.

The wide market sell-off has been tough for one of the biggest winners of the pandemic. With the reopening of physical stores, the reality check of normalized growth has begun. Amazon recently posted its lowest revenue growth in about 20 years. As a result of the slowdown, management has shifted its focus to improving productivity and cost efficiency as consumer spending patterns decline.

On the positive side, the market share the company gained during the early Covid days shows no signs of deteriorating. According to research group eMarketer, Amazon has an impressive 40% share of the US e-commerce market. This means that even if big box retailers like: Walmart and Target (not to mention a bunch of smaller retailers and mommy-and-pops) increasing their digital presence, Amazon is still the go-to destination for most online shoppers.

When Amazon reports Q2 performance next week, the bar will be set low. The Street expects split-adjusted EPS of $0.15, which would be an improvement from last quarter’s net loss, but far from a year-over-year period. But rest assured, management will find ways to become more efficient in the post-Covid world and confirm the company’s dominance in online shopping. This is an unusual time for Amazon and a time where it will come out stronger. The unusual share price makes it a great long-term purchase.

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