Perhaps the only silver lining in the late-year stock market selloff is that it provides investors with better entry points into the companies that are still benefiting from multiyear secular growth opportunities, particularly in tech.
Cloud computing chips, artificial intelligence, and digital commerce are three disruptive technologies that continue to drive significant change across vast sections of the economy.
In the spirit of the new year, we’ve analyzed those opportunities for the year ahead. Here are the best ways to play these themes in 2019:
Cloud computing chips
Corporations are shifting huge sums of their technology spending to the cloud due to its inherent cost savings and scaling advantages. While Amazon.com’s (AMZN) Amazon Web Services and Microsoft’s (MSFT) Azure are obvious winners, Intel (INTC) has quietly benefited as the main provider of server chips to the cloud. In its latest quarter, Intel’s chip sales to cloud providers rose 50%.
But the bigger winner next year in this burgeoning market may be Intel’s chief rival, Advanced Micro Devices (AMD). Last month, AMD unveiled its next-generation seven-nanometer (nm) server chip, called Rome, which will launch in 2019. Intel’s next-generation server chip, based on 10 nm technology, won’t ship until early 2020. Smaller nanometer manufacturing processes have historically allowed semiconductor companies to create faster, more power-efficient chips.
“We feel really good about where the performance of Rome [will be] relative to the competition,” CEO Lisa Su told Barron’s in November. “We expect meaningful revenue in 2019 from Rome.”
She added that her aspirations were larger than AMD’s previous historic high of 25% of the server chip market that it had in 2006. Last year, the company had less than a 1% share of that market.
“Next year will be the first time in a decade AMD will have a performance per watt advantage over Intel,” says Cowen analyst Matthew Ramsay. “Intel’s customer base is anxious for a viable second-source supplier.”
Ramsay cautions that AMD is facing near-term challenges in its graphics chip business and from a weak chip demand environment, emphasizing that the server upside will only appear later in 2019.
Adam Stern, chief executive of Los Angeles–based cloud-computing vendor Infinitely Virtual, told Barron’s his frustration with Intel’s security vulnerabilities is driving his company to consider AMD for the first time.
In early January, Intel acknowledged vulnerabilities in its PC and server chips known as Spectre and Meltdown. The company has continued to issue patches to address the security issues.
“Intel’s answer was to have an army of salespeople call and try to tell everyone that the processor impact [from security patches] is not severe,” he wrote in an email.
Stern wrote that the patches have caused performance hits to his company’s Intel-based servers. “The industry is left holding the bag. We will be testing AMD processors this quarter.”
Stern is likely not alone. A June JPMorgan survey of more than 150 chief information officers revealed that 20% of corporations planned to use more AMD-based servers for their cloud-computing workloads.
AI is no longer the purview of science fiction movies. Alphabet’s (GOOGL) AI technology is already enabling mind-blowing capabilities in its Android phones, including photography in the dark with its Night Sight machine-learning feature.
Alphabet’s “Google is clearly one of the leaders in AI. This company has arguably invested more in AI development and applications than any other company in the world,” Mark Mahaney of RBC Capital Markets wrote in an email to Barron’s.
But no AI application may have greater upside than self-driving cars.
JPMorgan internet analyst Doug Anmuth on Thursday wrote that Waymo, Alphabet’s autonomous-driving subsidiary, will be the company’s “next big business, and we believe it will surpass GCP [Google Cloud Platform], Google Play, and Hardware.”
Earlier this year, Mahaney’s firm estimated that the market for autonomous-driving taxis could reach $3.8 trillion by 2050. Intel’s interim CEO Bob Swan says he expects the technology for fully autonomous vehicles to be ready in five to 10 years.
That will be a boon for Alphabet since its Waymo unit is widely regarded as the leader in the field.
It is still the early innings for e-commerce in terms of taking share in sales from physical stores. Two of the biggest beneficiaries of this trend, still in the sweet spot of their growth cycles, are PayPal Holdings (PYPL) and Grubhub (GRUB).
On Thursday, MoffettNathanson analyst Lisa Ellis predicted that an expanded e-commerce deal between PayPal and Facebook (FB) could happen imminently. “We believe it is quite likely that Facebook and PayPal announce a significant expansion of their partnership sometime in the coming months—an expansion that, in our view, could be a game-changer for PayPal,” she wrote.
A new deal that includes Facebook’s Instagram could bring 40 million to 60 million new users to PayPal, while a WhatsApp deal could produce a similar amount, she estimates. In addition, she says, a Facebook Marketplace deal may add up to $1.5 billion in annual sales for PayPal. Ellis said PayPal offers “best-in-class online” payments capabilities and technologies to Facebook.
In similar fashion, Guggenheim analyst Matthew DiFrisco believes Grubhub is the unique leader in the online food delivery space. He estimates it has nearly 50% of the digital third-party delivery market, more than double its nearest competitor.
“As consumers are ordering more on their apps, food delivery is an increasingly demanded service,” he told Barron’s in a phone interview. “Grubhub has a proven track record in driving orders to restaurants at a greater velocity than its peers.”
The analyst predicted Grubhub can grow its sales by 25% annually for the next five years.
In late October, Grubhub shares fell significantly after it gave lower-than-expected profit guidance for the fourth quarter because of its decision to expand into more new markets. At the time, the company said it planned to spend an additional $20 million to $30 million in marketing and delivery expansion. If Grubhub is able to reap dividends from its new investments, the stock is likely to rebound next year.
A month ago, this column suggested that Apple (AAPL) stock could fall about 15% to $165, using the last disappointing iPhone product cycle—the 6S and 6S Plus—as a reference point. At the time, it was a bold call given that the shares had already dropped by some 17% from their earlier highs. But it proved prescient when Apple hit $165 earlier this week.
While there is likely a bumpy ride ahead, Barron’s now believes Apple shares have priced in the weak iPhone cycle and are attractively valued for long-term oriented investors.
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