Even market darlings eventually lose their luster. Tech stocks from social networking giants to chipmakers have taken a beating in recent months—punished for privacy and data-leaking scandals, slowing user growth, uncertain demand for new Apple iPhones, and, in some cases, higher costs on Chinese imports thanks to tariffs. But neither controversy nor a brewing trade war can stop global society’s shift to consuming media on the Internet. “Unless someone convinces me that all of us are going to go back to TVs and radios, I still think digital advertising is a place where the growth will continue,” says Melda Mergen, deputy global head of equities for Columbia Threadneedle Investments.
That’s good news for Facebook and Alphabet, whose stocks were both in bear market territory this fall, providing a rare chance for investors to get in at a discount. Facebook, for one, is trading at its lowest valuation ever, just 19 times earnings—about the average of the S&P 500 and half as expensive as it was a year ago. “This may end up being one of the last buying opportunities,” says Dan Chung, CEO and CIO of Fred Alger Investments, who owns both stocks.
Over 20 years, Alphabet has grown from the Google search engine into a portfolio that includes eight products with more than 1 billion users apiece (the cloud storage platform Google Drive joined the club earlier this year). That portfolio is increasingly powered by artificial intelligence. “Search is a wonderfully scalable treasure trove of data,” says Chris Lin, portfolio manager of the $19.6 billion Fidelity OTC fund, of which Alphabet is among the largest holdings. “If A.I. and machine learning are the next trend in computing, they are at the forefront.” And while the sheer scale of personal data that Alphabet and Facebook control has lately become a sore point for their public images and drawn regulatory scrutiny, the companies have also announced steps to better protect consumers. “I think there is this misconception that they’re just selling data,” Lin says of Alphabet. “Google has actually been pretty careful around this.”
There’s another form of media that consumers show no signs of kicking: video games. “Video games still represent a very, very affordable and, in fact, maybe too affordable form of entertainment,” says Lin. He owns Activision Blizzard, which sells games like Call of Duty for $60 or less. At that price, customers who play 12 hours a week—the average amount for U.S. gamers in 2018, according to NPD Group—spend about 10 cents an hour on the activity in a year. That should leave players with pocket change to spend on in-game purchases of add-ons like virtual costumes, weapons, and other equipment—which are on track to account for more than $4 billion of Activision’s expected $7.4 billion in sales this year. “We think the Western consumer is certainly willing to spend on those things,” adds Chung. Chung also likes Take-Two Interactive Software, which in October set a new record for opening weekend sales with its new game, Red Dead Redemption 2, grossing $725 million in three days.
Of course, neither gaming, computing, nor A.I. would be possible without semiconductors, those tiny but powerful bits whose stocks have tumbled recently over worries about a slowdown in Chinese demand, potentially exacerbated by a trade war. One company that has been unfairly punished is Texas Instruments, says Dave Eiswert, portfolio manager of the $1.2 billion T. Rowe Price Global Stock fund. The chipmaker, whose balance sheet is so robust it returns virtually all of its free cash flow to shareholders, is trading 20% below its peak, giving it a dividend yield of more than 3.2%, higher than it’s been in years, Eiswert says. Besides, he adds, investors are likely overestimating the company’s trade war risks: While Texas Instruments does derive about 44% of its sales from products shipped to China, many of those goods are ultimately exported elsewhere, likely ducking Chinese tariffs.
Take-Two Interactive Software