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Beijing Escalates Trade Dispute: Tech Stocks' Valuations Ripen

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Market Slides on Chinese Trade Retaliation

China has thrown more fuel on the “trade war” fire today as they retaliate to President Trump’s decision to amplify import tariffs on Chinese goods last week. Beijing is increasing tariffs on approximately $60 billion of American imports. Raising this tariff from 5-10% to as much as 25%, sending the US equity market tumbling. The S&P 500 has stumbled over 2.2% today so far, down 3.4% in the past 5 trading days.

This could be an excellent opportunity to buy those tech stocks you’ve been waiting to get into but haven’t been comfortable with the valuation. Stocks like Alphabet Inc. (GOOGL - Free Report) , Facebook (FB - Free Report) and Intel (INTC - Free Report) are starting to look ripe for a buy at their lowered valuations.

The underlying fundamentals of these stocks and the broader economy have not changed. The market is breaking down because of fear. Investors are afraid of the implications a dragged out trade war would have on the economy.

These tariff escalations were not priced into stocks, so traders and investors are now scrambling to do so, pushing equity valuations down. What we as retail investors need to consider is Trump’s obsession with the stock market’s performance. Trump sees the stock market’s performance as his report card and will ensure that the market stays afloat. He will do everything in his power to close this trade deal with China if it continues to weigh down the market. We haven’t seen a sense of urgency with trade negotiations thus far because the market has rallied so hard this year, but this seems to be coming to an end.

Stocks to Consider As Market Stumbles:

Google (GOOGL - Free Report) :

Google has been a household name in tech for roughly 2 decades. Google’s been the #1 US internet search engine since the early 2000s. This firm has been able to monetize its search engine to become an advertising machine. Google knows everything about consumers from their online shopping habits to their offline ones. It is able to productively advertise to each individual based on needs and wants, using all the data it has collected on us during its many years of operation.

Google is the leader in internet advertising, a fast-moving industry that is expected to grow 15% year-over-year for the next 3 years (according to Edward Jones). Google has been the leader in this space for years, but faces competition with Facebook (FB - Free Report) and Amazon (AMZN - Free Report) nibbling at its heels. I believe that Google has the competitive advantage of user data as well as brand loyalty with businesses.

GOOGL was walloped after its last earnings report disclosed a slowdown in ad revenue from the previous quarter. This is the first sequential quarterly drop since Q1 last year, but still illustrating year-over-year growth. I believe that this subsequent loss was just seasonality and nothing systemic considering that ad revenues have been historically weak in Q1.

Only 17% of Google’s revenue comes from its Asian-Pacific operations. Google’s financials don’t disclose how much of its revenue is from China specifically, but this region has grown its top-line over 27% year-over-year despite the trade dispute. I believe that these trade concerns are misplaced with GOOGL and that this stock break down is creating a solid buying opportunity.

Trade concerns combined with weaker than expected earnings have caused GOOGL to slide 10% over the past 2 weeks, pushing it today below its 200-day moving average. This firm is trading below its median forward 12-month P/E and is lining up to be a great buy. Google is the leading player in the proliferating internet ad space, and I only see blue skies ahead. I would look to buy GOOGL as it slides into the $1000-$1100 range.

 

Facebook (FB - Free Report)

Facebook has been in my rear view mirror for the past 6 months and feel that I keep missing my buying opportunities, but I can assure you this won’t happen again. Facebook consistently beats earnings and revenue estimates, and the stock continues to be propelled to no end.

Just this year FB is up over 39%, which is a great sign for investors that have been long all year but makes new investors, like me, hesitant to jump in. Something that has grown that fast in such a small amount of time is bound to hit a resistance level, right? Well, it looks like we might have just bounced off of that when FB hit its 2019 high of $195 right before trade tensions resumed last week. FB is still 13% of its all-time high of $210 that it hit in July of last year.

This trade dispute should have minimal effects on Facebook’s revenue outlook considering that the platform is technically banned in China. The concern is Facebook’s future in this massive untapped market. If a trade agreement opened China’s internet boarders to Facebook, its TAM would grow by about 1 billion and propel FB’s valuation to the stratosphere.

FB is trading at a forward 12-month P/E of 22.1x, slightly below both its 2-year median and the internet service industry average. This valuation is still a bit high for my liking and would like to see this hot stock fall below $170 before I am enthusiastic about taking a long position.

This firm is a fast-growing internet ad medium that effectively utilizes businesses advertising seamlessly on all of its platforms. They are gaining market share on internet ad leader, Google, and are expected to continue to outperform this rapidly growing space. FB – Zacks Rank #2 (Buy).

Take Away

These heightened trade concerns are likely only temporary considering President Trump’s obsession with stock market performance. Underlying fundamentals of these hot tech stocks haven’t changed; fear is only ripening their valuations. I would be cautious about getting in too early considering equities still could have more room to slip. Wait for these firms to slide to a level that you are comfortable with and execute the buy before you miss your window of opportunity.

 

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Amazon.com, Inc. (AMZN) - free report >>

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Intel Corporation (INTC) - free report >>