A bear market rally, or the start of another bull run?
This was the question posed by Wedbush Securities in the wake of the latest earnings season from the US tech sector and after a 17% rally of the Nasdaq from its mid-June low.
Two things here: Wedbush is a closely followed west coast US investment firm known for its tech coverage; a bear market rally is a rise of more than 10% in a stock or index between peak and trough.
Although Wedbush isn’t definitive in its assessment of the question, it is leaning heavily towards the ‘bull run’ thesis, though it thinks there will be pain for some.
Small with shallow moats
“Smaller tech players with less stable business models and unproven moats will struggle mightily over the coming quarters and multiples will continue to compress for many unprofitable tech names with choppy execution,” said Wedbush in a note to clients.
“However, we believe the fourth industrial revolution tech trends are not going away due to this slower near-term period of growth over the next six to nine months and we firmly stay bullish on tech stocks into the second half of the year.”
Microsoft Corp (NASDAQ:MSFT), Apple Inc (NASDAQ:NASDAQ:AAPL), and Palo Alto Networks Inc (NASDAQ:PANW) are its "favourite" techies to own "into year-end".
The investment house pointed out that the trifecta of rising inflation, interest rates and slowing economic growth put a dent in the earnings of the great and the good of Silicon Valley.
Cliff edge avoided (for now)
That said, it was not the cliff edge collapse in profitability many had expected to accompany the Valley’s Q2s.
“Fast forward to today and June earnings season was a major victory parade for the tech bulls as enterprise spending, cloud-driven budgets, consumer product/e-commerce demand, and even digital advertising was much better than feared given the white knuckle backdrop,” said Wedbush.
Looking ahead, analysts will be keenly eyeing whether corporate spending on technology and software has held up as well as consumer demand with results from Salesforce Inc, Palo Alto, Okta Inc, and Crowdstrike Holdings Inc providing the performance yardsticks.
Two to watch
Ahead of the numbers, Wedbush reiterated its ‘outperform’ ratings for Salesforce and Palo Alto with price targets of US$225 and US$580 respectively.
On Salesforce (referred to by its ticker CRM), Wedbush said: “We believe CRM is seeing some softness around the edges however its core deal flow looks firm based on our checks with some large deal activity seen as more enterprises shift cloud deployments.
“This is a hotly debated name on the Street given the shaky macro; however, we believe many investors are overlooking the underlying secular cloud strength for CRM into 2023.”