As China's economic slowdown sends ripples across the global market, investors are seeking solid ground in a shaky landscape. Recent data has shown troubling trends in China's retail sales, industrial output, and investment, leading many to worry about the long-lasting impact on growth. What happens in this massive economy can affect the fortunes of people and businesses around the world.
But China's rocky road doesn't have to be bad news for your investments. Three of The Motley Fool's top tech experts have scoured the scene to find companies and stocks resilient to the Chinese challenges. They unearthed three magnificent tech stocks poised for wealth-building success without the help of the world's second largest economy.
In this report, you'll find Alphabet (GOOG 9.96%) (GOOGL 10.22%), a digital titan unfazed by global tremors; Netflix (NFLX -0.63%), a streaming juggernaut with a nearly perfect global footprint; and Amazon (AMZN 3.43%), the e-commerce behemoth that's thriving amid uncertainty. Here's why these three formidable tech stocks stand ready to defy China's slowdown and strengthen your investment portfolio.
Alphabet is primed for profit growth
Billy Duberstein (Alphabet): Search and YouTube parent Alphabet doesn't do business in China, which already has its national champion imitator, Baidu (NASDAQ: BIDU). But after a bit of a malaise in the digital ad market, last quarter showed things picking up for the digital ad giant. And the fears over the threat that artificial intelligence would upend some of Alphabet's businesses, such as Search, seems to have subsided. In fact, AI may now even be seen as more an opportunity for Alphabet than a threat.
Last quarter, Search revenue reaccelerated, growing 4.8% over the first quarter's 1.9% growth, and YouTube reverted to 4.4% growth after its first ever year-over-year revenue decline in Q1. That seemed to show Alphabet's digital ad tools resonating with customers, even in a still-challenging economic environment.
And YouTube ad revenue doesn't even count YouTube subscriptions. On the conference call with analysts, CEO Sundar Pichai noted that the strong 24% growth in the "Google Other" category revenue was led by YouTube subscriptions, including YouTube Music, YouTube Premium, and YouTube TV. In fact, Alphabet actually just raised the price of YouTube Music and YouTube Premium subscriptions in July, so those increases weren't even factored into the subscription growth last quarter. Moreover, the upcoming NFL season will be the first time NFL Sunday Ticket will be available outside of DirecTV, with YouTubeTV landing the exclusive rights to stream out-of-market games this fall.
While the ad and media rebound is encouraging, the biggest opportunity for Alphabet is likely to be AI, both in its own products and in Google Cloud. Speaking of Google Cloud, it grew a healthy 28% last quarter. That's pretty impressive, considering customers are widely known to be in cost-cutting and "optimization" mode. And after generating its first profitable quarter ever in Q1, Google Cloud expanded those profits it Q2 with $395 million in operating profit, more than doubling its $191 million profit from Q1.
Alphabet has intriguing prospects in Cloud, as it has not just industry-standard AI infrastructure but also its own proprietary Tensor Processing Units chips for inference and training, giving AI customers more choice. On that note, CEO Sundar Pichai noted that 70% of generative AI unicorns today use Google Cloud. Given the growth prospects of that industry, those clients should grow their cloud spend by leaps and bounds over time.
And even Alphabet's "Other Bets" segment, which has generated billions in losses over the life of these startup projects, showed a promising narrowing of operating losses relative to last year. CFO Ruth Porat also announced she will be transitioning to a chief investment officer role, a new position that was described as "responsible for Alphabet's investments in its Other Bets portfolio, working closely with Sundar, and the company's investments in countries and communities around the world."
That could mean that even the perennial loss-making Other Bets could get a healthy dose of financial discipline from Porat, who has succeeded in bringing financial discipline to Alphabet over her eight-year tenure, and oversaw the implementation Alphabet's first-ever buyback shortly after taking the position in 2015.
Still reasonably priced at just 23 times this year's earnings estimates, Alphabet, with its AI-fueled growth in advertising and cloud combined with newfound financial discipline, could be an excellent combination for investors.
Netflix can soar without China
Anders Bylund (Netflix): Video-streaming pioneer Netflix offers digital entertainment services almost everywhere. The United Nations recognizes 195 countries in 2023. Netflix services are available in more than 190 of them.
China is not on the list. It probably won't be anytime soon, either. The closest thing to a Chinese Netflix service is the simplified Chinese subtitles and Mandarin audio dubbing it provides for Chinese speakers in other countries.
So this stock is in no danger of being ensnared in the Middle Kingdom's economic challenges. And the stock looks like a rock-solid buy on its own merits.
This former market-darling growth stock changed hands at incredibly rich valuation ratios until fairly recently. The adjusted price-to-earnings ratio (P/E) peaked at 420 times earnings in 2016. Price-to-sales (P/S) rose to 14.6 times trailing revenues two years later.
Today, Netflix's stock looks more like a calm value investment. The P/S has dropped down to 5.7 and P/E stands at 47. Sure, those values stand a bit above classic value stocks, but most value-minded investors don't expect a compound average sales growth rate of 22%. That's what you get with Netflix stock -- growth-stock horsepower in a value-priced chassis -- and I'm convinced that the growth will pick up more speed over the next few years.
The company is knee-deep in an economic quagmire and a radical business strategy shift. Netflix has introduced ad-based service plans in nearly 100 countries so far, planning to saturate its entire network with these lower-priced options over time. Early results have been inspiring, even though the ad-supported plans were launched in the middle of an inflation-based advertising downturn.
These issues are difficult or even painful in the short term, but they won't last forever. Imagine how profitable the ad-boosted plans can be in a healthy economy, where consumers are ready to buy the stuff they see in the ads. The same turnaround should also help Netflix's eternal Quest for More Subscribers(tm), though that epic quest has changed into a Quest for Profitable Growth(tm) in recent quarters.
So if you're looking for a spectacular long-term growth story with no substantial business in China, Netflix should be at the top of your list.
E-commerce is back on the rise, and in a new package
Nicholas Rossolillo (Amazon): To say Amazon is totally immune to a slowdown in China's economy would be a misnomer. The world's second largest economy can send ripples (big waves, even) that impact all sorts of seemingly disconnected businesses.
But Amazon's e-commerce marketplace doesn't operate in China. Amazon Web Services (AWS), the cloud division, has two small subsidiaries that offer services on the mainland, but it's a small piece of the pie. That leaves the bulk of financial results tied to North America, and Amazon's e-comm empire is making a comeback. North American sales jumped 11% year-over-year in Q2 2023, and operating metrics flipped from a loss of $627 million in Q2 last year to a profit of $3.2 billion this year.
The company's right-sizing of its large e-comm distribution center and delivery network is clearly starting to pay off. In addition, though AWS has been going through some growing pains, it remains an absolute cash cow that continues to provide the bulk of Amazon's reportable bottom line. Operating margin at AWS was 24% last quarter, not bad for what has been billed as a "recession year" or at best a "2023 economic slowdown."
Over the past few years, Amazon's e-comm has also been undergoing some transformation into more of a platform for other online sellers. The digital ads and third-party e-commerce services segments are now quite large -- revenue of $10.7 billion and $32.3 billion, respectively, last quarter alone -- and still expanding at a very healthy clip. Digital ad services grew 22% year over year in Q2, and third-party services 18%.
These two areas in particular are emerging as a second and third profit center behind the AWS crown jewel. Amazon still has lots of runway ahead of it to grow profitably, and it looks well positioned to gloss over any turbulence caused by fears of China's economic slowdown.
