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Ignore the Short Squeezes: These Tech Stocks Are Better Buys

By Billy Duberstein - Apr 4, 2021 at 7:11AM

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Lower-quality meme stocks get lots of headlines, but high-quality tech stocks will do better over the long run.

The first quarter of 2020 was a break from the recent past. For the first three months of 2021, beaten-down value stocks with significant business problems such as GameStop (GME 9.85%), AMC Entertainment, and Sundial Growers skyrocketed higher on turnaround hopes. In contrast, the high-growth tech winners from 2020 flatlined, or even declined.

Beginning with GameStop, retail investors targeted deep-value stocks with high short interest, buying up these names and forcing "short squeezes." While there's nothing wrong with making those types of risky investments provided you do your homework, these "stock pops" appear to have already played out, and significant execution risk remains for these types of companies.

Instead of trying to ride short-term momentum, investors are likely much better off investing in strong companies with excellent long-term growth prospects and reasonable prices. That's why Micron Technology (MU 6.22%), Alphabet (GOOG 2.96%) (GOOGL 2.84%), and Dell Technologies (DELL 3.09%) all look like great buys as we enter April.

A young woman looks at a screen as computer code scrolls by.

Image source: Getty Images.

Micron Technology: Get ready for massive cash flows

Memory and storage specialist Micron just reported quarterly results last Wednesday, and they were impressive. Revenue grew 30% year over year as DRAM pricing rebounded, and adjusted (non-GAAP) earnings per share of $1.13 beat analyst expectations. Guidance of $1.62 next quarter, or 43% sequential growth, showed continued strength as Micron enters a major DRAM upcycle.

On the conference call with analysts, management noted "broad strength across nearly all end markets," as demand across 5G, data centers, graphics, and auto chips soared, spurred by digital trends accelerated by the pandemic.

But what has analysts really excited is that Micron isn't significantly ramping up capital expenditures, even with a current shortage. That's a big sign of discipline coming from the commodity-like memory-chip industry, which increased capital expenditures significantly during the last boom of 2017-2018, only to oversupply the market and cause a crash as the trade war took hold.

This time, it looks as though Micron is keeping its production plans in line with the initial figure announced last year, and not chasing demand on a short-term basis. C.J. Muse of Evercore ISI said in a note that "considering the current shortage situation and disciplined capex, it's hard not seeing this cycle lasting longer than previous cycles."

While Micron's stock has been on a nice run, having essentially doubled in the past six months, it only trades at 8 times the prior cycle's peak earnings of $11.51 in 2018. If this current upcycle is bigger and better, Micron's stock may just be getting started.

While work-from-home e-commerce and SaaS (software-as-a-service) stocks had an exceptionally strong 2020, it could very well be the more cyclical semiconductor sector that rebounds the most in 2021.

Dell Technologies: Spinoff in the offing?

Like Micron, Dell Technologies is also hardware-focused, and could be in for a good 2021. Dell's enterprise server segment fell slightly in 2020, but its consumer laptop segment came in extremely strong. Laptop demand was the strongest in over a decade as people worked from home more often. And some of these work-from-home trends should remain, even post-pandemic. Meanwhile, enterprise servers should bounce back stronger as the economy recovers.

But what's really exciting about Dell right now is its potential spinoff of its VMware (VMW 0.57%) stake, which could come in September of this year. Dell owns 80.6% of VMware, which makes enterprise software for hyperconverged computing, cybersecurity, and other applications to navigate a multicloud world.

The rest of VMware's shares are publicly traded, and its market cap is $63.6 billion. That means Dell's stake is currently worth $51.3 billion. Yet Dell's total market cap is only $67.9 billion, meaning the "non-VMware" parts of Dell are only being valued at $16.6 billion. Dell's non-VMware segments made over $7 billion in operating income in 2021, so investors are essentially paying just 2.5 times operating earnings for "core" Dell.

While it's not 100% certain the spinoff will happen, management's past comments seem indicate that it will. And CEO Michael Dell is a large shareholder who would also benefit.

Look for investors to realize the big discount as September rolls closer.

Alphabet: A stay-at-home and reopening stock, soon to advertise cannabis

One of the more software-oriented tech companies that could do well post-pandemic is Alphabet. As travel and leisure businesses bounce back, they should buy more of Google's search advertising. As recently as 2017, 12% of Google's ad revenue came from travel and leisure.

During the pandemic, that hit Alphabet hard; it reported its first-ever revenue decline as a public company in the second quarter of 2020. However, ad spending eventually returned. By the fourth quarter, Google's ad revenue grew 21.8%, fueling 23.5% year-over-year growth for Alphabet overall. If travel and leisure come back strong once most Americans are vaccinated, the strong recent digital ad trends could even accelerate.

Alphabet's YouTube also just relaxed rules on advertising cannabis products. Due to a "green wave" of many U.S. states legalizing adult-use cannabis, and potential rollbacks of federal laws making their way through Congress, YouTube apparently feels comfortable allowing cannabis advertising in legal-use states. Of course, that's as long as it's "information presented in an objective, informative, educational and 'non-glorified' manner." YouTube's change in policy will take place sometime in April.

Alphabet also doesn't look that expensive at just 36.5 times trailing earnings. While that may seem high, consider that 2020 earnings reflect an abnormal dip in the first and second quarters. Alphabet also has nearly 10% of its market cap in cash on its balance sheet.

Furthermore, Alphabet's high-growth cloud computing platform racked up $5.6 billion in operating losses last year, even though that division is extremely valuable. And the "other bets" segment, which includes Waymo and other futuristic moonshot projects, lost $4.5 billion. Adding those back would boost Alphabet's reported operating income by about 25%.

With multiple growth businesses set to bounce back from the pandemic, and a still-reasonable price, Alphabet seems like a much better bet today than the more "exciting" meme stocks currently dominating the headlines.

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Stocks Mentioned

Micron Technology, Inc. Stock Quote
Micron Technology, Inc.
$71.92 (6.22%) $4.21
Alphabet Inc. Stock Quote
Alphabet Inc.
$2,321.01 (2.84%) $64.13
VMware, Inc. Stock Quote
VMware, Inc.
$100.18 (0.57%) $0.57
GameStop Corp. Stock Quote
GameStop Corp.
$98.39 (9.85%) $8.82
AMC Entertainment Holdings, Inc. Stock Quote
AMC Entertainment Holdings, Inc.
$11.81 (5.45%) $0.61
Alphabet Inc. Stock Quote
Alphabet Inc.
$2,330.31 (2.96%) $67.09
Dell Technologies Inc. Stock Quote
Dell Technologies Inc.
$45.09 (3.09%) $1.35
Sundial Growers Inc. Stock Quote
Sundial Growers Inc.
$0.38 (2.51%) $0.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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