Finding value investments in the tech sector - Yahoo Finance

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With the Magnificent Seven controlling nearly 30% of the S&P 500's value, the tech sector may feel crowded out. However, there are other value-based tech picks that investors may be overlooking.

The Futurum Group Chief Market Strategist Cory Johnson and Deepwater Asset Management Managing Partner Doug Clinton join Yahoo Finance to discuss hidden gem stocks within tech.

Johnson explains that investors may need to reframe their investments in tech beyond growth: "We've seen tech as growth and indeed a lot of tech companies without profits are hard to value as value stocks, but I think a lot of that has changed over time and we've seen the king of all value investors Warren Buffett with his giant holdings in Apple (AAPL) and in this notion that technology can't be valued is just wrong, and then there's timing and that's when investors have to think about what they're investing for and what kinds of returns and when they need them and to understand if it's worth a long wait."

Clinton emphasizes that it may be important to look downstream of tech giants. SK Hynix (000660.KS), he points out, is a provider of tech to Nvidia: "Nvidia uses the Hynix's high bandwidth memory in their chips that are in huge demand right now from hyper-scalers and now potentially sovereign nations and other industrial companies that are building their AI infrastructure, so we see Hynix which a holding in our Deepwater Frontier Tech index, that powers the Loup ETF (LOUP) –– we see Hynix as a potential beneficiary of continued demand for those Nvidia chips. "

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

[AUDIO LOGO]

JULIE HYMAN: With just over 10 minutes left till the closing bell on Wall Street, we're looking at how to navigate the big picture with the Yahoo Finance Playbook. Well, it's mainly big names like Nvidia and Meta making headlines for record gains. We are taking a closer look at where and why investors can find value within the tech sector.

Joining us now, Doug Clinton, Deepwater Asset Management Managing Partner and Cory Johnson, the Futurum Group Chief Market Strategist. Thanks, guys for being here. Cory, I want to start with you, because usually we think of growth and value as sort of being diametrically opposed. But when does it make sense for investors to look for value in tech traditionally, a sort of growth-ey sector?

CORY JOHNSON: Well, yeah. I mean, there are classical definitions of these types of names. And historically, we haven't seen-- we've seen tech as growth. And indeed a lot of tech companies without any profits are hard to value as value stocks. But I think a lot of that has changed over time.

And we've seen-- I mean, you know, the king of all value investors, right, Warren Buffett with his giant holdings in Apple and then this notion that technology can't be value is just wrong. And then there's timing. And that's when investors have to think about what they're investing for, what kinds of returns and when they need them. And to understand if it's worth a long wait, if there are some things that are willing to be more speculative and what the timing is for those investments, to figure out what the market is favoring at that moment.

There are times when the market loves value stocks. And there's times when the market hates it.

JOSH LIPTON: Doug, I want to bring you here in as well. And it's great to see you. As you note, Doug, you're finding deep value in tech can be a challenge. But you have some names for us. One is SK Hynix. Why would that name, Doug, maybe fit the bill here?

DOUG CLINTON: Josh, if you rewind the clock a year, Nvidia probably wasn't the greatest value in tech. It might have been the greatest value stock period over the last year in hindsight, because if you had a crystal ball, the stock at one point, probably traded below 10 times forward actual earnings. The business is growing so fast.

To your question about Hynix, Hynix is a memory supplier to Nvidia. So Nvidia uses Hynix's high bandwidth memory in their chips that are in huge demand right now from hyperscalers and now potentially sovereign nations and other industrial companies that are building their AI infrastructure. So we see Hynix, which is a holding in our Deepwater frontier tech index, that powers the loop ETF. We see Hynix as a potential beneficiary of continued demand for those Nvidia chips.

JULIE HYMAN: Doug, Something I'm curious to get your take on when it comes to something like an SK Hynix, which, you know, as we know, semiconductors traditionally have been a commodity business and memory chips particularly so. Do you see the AI cycle smoothing that out, making that business less commoditized?

DOUG CLINTON: I think in the medium term, yes. And so there is some nuance to this answer. I think that the AI cycle that we are just entering into right now will last likely longer than many of the other cycles that we've seen in the Past. I think we're going to have a very long road of infrastructure build to support AI, because right now the way that AI models work, intelligence is wholly dependent on electricity and chips.

And so as long as that is true with these models, and I think it will be true for several years from now, we're going to have to continue to build data centers that house thousands of these chips. And even though memory has been a little bit commoditized in the past, there's really only three big memory vendors. It's Hynix, it's Micron, it's Samsung. And I think Hynix has been on the front end of really aggressive development of new memory products. And that's why I think they'll stay in the lead.

JOSH LIPTON: And one more quick one for you, Doug, would you prefer SK Hynix dug over its big rival, Micron?

DOUG CLINTON: I think you can own both. And here's the thing that's actually a challenge, just a nuance for US investors. Hynix is a Korean-listed stock, so it's a little bit hard to get access to it. You can't get access in the loop ETF I mentioned a little bit earlier. For Micron, obviously, that's a US-listed stock. If you want to play just memory broadly and you want direct exposure, Micron's the easier route to go.

JULIE HYMAN: And so, Corey, I'm going to take it to you and see what you might be looking at here in the sort of given the parameters of what we're talking about here, value in this market.

CORY JOHNSON: Well, it's somebody's thoughts, right? So DRAM is DRAM. And the DRAM manufacturers have always told us that their DRAM special. And the market has always told us that that's not the case. And I think what we really know, you know, so whether it's Samsung or Hynix or Micron, DRAM prices are extraordinarily volatile, because they are-- it is easier to swap out DRAM than it is a CPU. It is a graphics processor is so difficult to swap out. That's why you've seen such fantastic topline growth from NVIDIA.

You know, and I think to Doug's point about value, I mean, I've been kicking myself for not owning NVIDIA in my personal accounts and in my portfolio. And yet I looked the other morning. And one of my biggest holdings for years has been Comfort Systems, which is not a stock recommendation. But it's just an observation that I was-- to try to stop from kicking myself-- was looking at this company, the Comfort Systems. That is HVAC repair, right? Nothing less sexy, nothing more "valuey," than this notion of fixing HVAC. And yet the performance in three years is almost identical to that of NVIDIA.

So-- and my point is that this market is actually a little more kinder to value investors than it has been for years and that we really are seeing winners separated from losers within technology and outside of technology. If you look at just today, right, look at CrowdStrike and how well that stock is performing compared to what's happening with Palo Alto Networks, Palo Alto Networks came out a few weeks ago and told us that they were seeing-- was it a week ago-- the time is flying-- telling us that they were seeing customer fatigue. And yet you see CrowdStrike going out to the same kinds of customers, saying those customers are happy to buy.

It suggests that the companies are performing differently and the market is able to determine winners from losers. A stock picker's market is a necessary element to a value stock performing. And what we see right now is, yeah, there-- while we are at all-time highs, or in and around, in the S&P 500 and the NASDAQ and beyond, what we're seeing is the market really is distinguishing between winners and losers. And NVIDIA has been a fantastic winner and, to Doug's point is, still on a PEG ratio, on a price to earnings growth ratio, a lot more affordable than many other companies, even in the same sector.

JOSH LIPTON: And Doug, I'll bring it to you and get you out of here on this one. I'm going to switch gears here, Doug, just because I'm very curious about your answer. Your firm, Doug-- it owns Alphabet. And there's a stock where, listen, it's in the red so far this year, Doug. There's been this real criticism, and you've heard it, of the company. It's just not moving fast enough when it comes to AI. As a shareholder, Doug, there, do you share that worry?

DOUG CLINTON: We've been super frustrated, I would say, Josh, in terms of the speed of development with AI. Google, Alphabet-- they have all the tools, all the components they need to be the real runaway leaders in AI. They have the data. They have the team. They have the distribution through products like Android and Chrome. They just haven't had the pace that OpenAI has had.

And that's what you see when startups like OpenAI disrupt incumbents. And that's a worry for us. They still have all those ingredients. That's why we haven't sold the stock yet and why we're still optimistic. But it has been frustrating for shareholders. And I think you're hearing more of that.

I think eventually, the company needs to make a statement, make a move, have some sort of almost a Meta-like moment a year ago, where they moved into a year of efficiency. They need something to light the fire again to put those assets into motion.

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