From Amazon to Alibaba: Here are Citi's top U.S. and China tech picks for 2021

Published Mon, Jan 25 20214:36 AM EST

U.S. and Chinese technology stocks had a great year in 2020, with the likes of Amazon and Tencent seeing double-digit increases in their share prices. While many tech companies benefited from a shift in consumer behavior toward e-commerce and other online activity, there are concerns that the giants of American and Chinese tech could come under further regulatory scrutiny this year. A ramp-up in the rollout of Covid-19 vaccines and the reopening of economies could also hamper the prospects of tech companies that have profited from stay-at-home trends. With that in mind, investors are no doubt asking how to play the sector in 2021 — and they're in luck. Citigroup has identified a raft of its top tech picks for the U.S. and China. Here are Citi's top picks for U.S. tech: Alphabet Amazon Facebook Roku Why it likes these stocks The bank is "generally bullish" on large-cap internet and digital advertising stocks in 2021. It expects the adoption of e-commerce to continue accelerating post-pandemic, benefiting the likes of Alphabet, Amazon and Facebook. "In contrast, we are less bullish on the stay-at-home beneficiaries ( Netflix , Activision and Electronic Arts )," Citi said. However, it warned that a Democrat-controlled Senate would heighten the risk for a number of Big Tech companies. A Democratic congressional staff report last year recommended changes to antitrust laws that could have major repercussions for Big Tech companies, such as spinning off or separating parts of their businesses. "We continue to see greater risk for Alphabet and Facebook, and less for Amazon," Citi said. "However, any regulatory headwinds are expected to play out over the course of several years." Additionally, Citi said two U.S. online education stocks — Chegg and 2U — were its top picks in the fast-growing educational technology, or edtech, sector. "We believe the pandemic represents a watershed in terms of attitudes to technology/edtech amongst educators," the bank said. "Specifically that some historical sources of inertia may finally be swept aside as the value of technology ... is truly being realized." Citi said it sees the size of the global edtech market "more than doubling" in the next five years, to $360 billion. Here are Citi's top picks for Chinese tech: Tencent Alibaba JD.com Kingsoft Cloud Why it likes these stocks Citi says investors should watch for some key trends in China's internet sector. Those include: moves aimed at engaging and retaining users, mainstream adoption of video and live streaming and a wider rollout of 5G mobile network connectivity. Tencent and Alibaba are its top picks out of the so-called BAT ( Baidu , Alibaba and Tencent) group of most prominent Chinese tech stocks. Tencent outperformed Alibaba last year, and is likely to see a continuation of momentum in its smartphone games business, a recovery in advertising sentiment, increased demand for video ads and growth in its fintech business. The bank said it likes Alibaba "because the valuation is attractive," despite concerns over a crackdown from Beijing on Big Tech. The State Administration for Market Regulation, for example, is investigating Alibaba over monopolistic practices. Beijing is also finalizing details of sweeping anti-monopoly reforms. "While there could be short-term regulatory overhang and concerns on competitive landscape for its commerce business, we see under-appreciated value for BABA's strengths in its integrated ecosystem, especially for the embedded value upside from its Cloud and Cainiao business," Citi said. As for JD.com, Citi said the e-commerce firm would face challenges including increased competition and demand, but it remains "constructive" and sees "faster growth momentum" in the company's logistics and health units. Meanwhile, Kingsoft Cloud is likely to get a boost from the "sustained growth of public cloud" in China, according to Citi, as well as new enterprise cloud projects and the industry's "multi-cloud" trend.

Exterior of Alibaba Group Beijing Headquarters on November 10, 2019 in Beijing, China.

VCG | Visual China Group | Getty Images

U.S. and Chinese technology stocks had a great year in 2020, with the likes of Amazon and Tencent seeing double-digit increases in their share prices.

While many tech companies benefited from a shift in consumer behavior toward e-commerce and other online activity, there are concerns that the giants of American and Chinese tech could come under further regulatory scrutiny this year.

A ramp-up in the rollout of Covid-19 vaccines and the reopening of economies could also hamper the prospects of tech companies that have profited from stay-at-home trends.

With that in mind, investors are no doubt asking how to play the sector in 2021 — and they're in luck. Citigroup has identified a raft of its top tech picks for the U.S. and China.