Just_Super/E+ via Getty Images
A big run higher for tech stocks in 2024, thanks to significant interest in AI, has left investors wondering if it’s time to take a step back and reassess the sector.
This is a viewpoint shared by Joe Albano, a veteran Seeking Alpha analyst and Investing Group leader behind the Tech Cache service. Albano is taking a cautious approach to tech investing in the new year. His observations, which combine fundamentals with sentiment readings using technical chart analysis, appear to show tech stocks, including the bigger Mag 7 names, potentially weakening.
How should tech investors approach 2025?
Albano says AI niche sectors may present opportunities. Investors should also review robotics and smaller mid-cap tech firms. These stocks present risk but also could deliver in certain bull market scenarios.
Albano presents his outlook below.
Seeking Alpha: We’re in the first month of 2025. Thoughts on how tech may perform for investors this year?
Joe Albano: Throughout early 2024, I anticipated and prepared for a correction over that summer. After a blow-off top run into the summer, nearly all of the big names and most of tech (QQQ) found itself in a steep decline and correction by the end of the season. Once that recovered, I was not satisfied with the rally that ensued, which brought many to new all-time highs, and not because I was raising cash most of 2024 but because of the structure of the rally on the chart. I pointed this out in my segment during the 2024 Election Forum Seeking Alpha hosted. The rally (SP500) (SPY) hasn’t given me the warm fuzzies.
Therefore, even with what could be smaller pushes into all-time highs on some of the popular tech stocks, we’re getting into shaky territory to hold those gains. Even the weak structures I talked about, which don’t look suitable to form further rallies, are ending. When they do, it won’t be good for bulls. However, the see-sawing back and forth at these elevated levels may go on for a few short months before the real selling begins. It really depends on how the markets react at support levels on the charts.
Overall, I remain cautious, and I’m looking for diamonds in the rough, where bullish sentiment may not be at its peak yet. Combined with fundamentals, I use this two-pronged approach as the foundation for my analysis provided to Tech Cache subscribers. With that in mind, robotics and smaller and mid-cap names are potentially good targets for investors but are much more risky. This is late bull market type of investing, though, so it aligns with my overall perspective.
Seeking Alpha: You’ve analyzed a lot of what’s happening in the AI space, including AI accelerators, AI software ideas, etc. What are investors missing in the AI space that presents an opportunity?
Joe Albano: The majority of investors are stuck inside the box. This will hurt their portfolios in 2025 as they don’t consider other areas, sectors, and names to invest in. Seeking Alpha’s sentiment survey, where it even excluded Nvidia (NVDA), still puts some of the best-performing names at the top of the list, like Palantir (PLTR), Microsoft (MSFT), Broadcom (AVGO), and Google (GOOG) (GOOGL). These are not the names that will lead returns in 2025 as they’ve already seen their sentiment push to be as bullish as possible in 2024. This circular sentiment has become self-evident as Seeking Alpha readers continue to vote for them to be the best in 2025.
Therefore, as I mentioned in the first question, it’s time to explore other ground-level areas, such as robotics and niche AI needs, such as those providing the tech behind the tech. We are moving through the revenue funnel of AI and seeing a move from the hardware and middleman tiers to the “retail” tiers. This is where the compute and cloud space investments are turning toward smaller companies producing usable AI products.
Seeking Alpha: There’s always that big focus on Nvidia and AI. And, to a lesser extent, AMD (AMD). There are the up-and-coming companies that surface, such as Cerebras (CBRS). What do investors need to know about these stocks?
Joe Albano: Always be careful of anyone selling you the next greatest thing without proof. Names like Cerebras fill a niche to provide AI inferencing. Still, many potential customers will remain skeptical of purchasing these products without rock-solid software and a widely adopted software stack. Dig into the financials and understand who the customers are and how concentrated they are. If a company – Cerebras, for example – shows 90% of its revenue comes from one company, you have to ask the question: Why?
Meanwhile, you must take stock of your emotions and not fall for the latest and greatest in these new sectors – case in point: Quantum computing. In December, I outlined how investigating these companies may be worthwhile, but their commercialization is much further away than the market thinks. Thus, the massive selling after Jensen Huang mirrored my comments isn’t surprising.
Seeking Alpha: You’ve covered other big names in tech (and their AI efforts). Thoughts on how investors should look at Google, Meta (META), and other Mag 7 stocks?
Joe Albano: At this point, many of these AI capex investments will start hitting the P&L sheet with depreciation. Meanwhile, Mag 7 revenue growth this year and next will depend on who made the right decisions about where to use these AI hardware investments in their money-making products. Meta Platforms is likely the winner in the strategic use of AI, while the rest vary between not putting it in the right areas or failing to use it to the best of their abilities. Up until now, Google has had no decisive strategy and has been applying it with limited success across the board. However, it may now close the gap and perhaps have a more meaningful growth period in 2025.
However, even with my tenuous view of 2025’s growth for the Mag 7, their charts are still very questionable. They are looking to top, with some substantial downside possible in Q1 this year. But I caution, this downside may not be a buy-the-dip moment. While I expect a bounce following this decline, what comes after will be much more severe if the charts play out as I view them now.
Credit: Source link
