JPMorgan names 6 global stocks to navigate tech sector weakness

Published Tue, Feb 15 20226:55 PM EST

Technology stocks have had a rough start to the year, but JPMorgan thinks some companies could still do well and has named six of its favorite picks from the sector — all rated overweight by the bank. The tech heavy Nasdaq Composite is down around 12% this year, with tech stocks suffering a steep decline as investors brace for tighter monetary policy to combat inflation. Tech and other growth stocks are more sensitive to interest rate hikes as they make future earnings less attractive to investors. The European internet sector too, has underperformed materially, with the sector declining 22% so far this year, JPMorgan's analysts, led by Marcus Diebel, said in a research note on Feb. 9. The bank noted that the sector has been heavily impacted by fears of rapidly rising interest rates combined with negative effects from coronavirus re-openings. "Stock picking in this environment has become more complex with volatility in tech valuations whilst M & A expectations are increasing," Diebel added. Against this "rather difficult" backdrop, the bank screened for stocks with upside to its short-term estimates, and also had meaningful profitability, potential for M & A and looked cheap, according to the bank. Online classifieds On a sectoral basis, online classifieds is the bank's favorite sub-sector. The bank said the space is "highly profitable" and "cash generative," while private equity has historically been very active in this sub-sector, Diebel said. German digital real estate marketplace Scout24 is the bank's top pick in this space. The company has completed several acquisitions and is also transitioning from traditional online classifieds to participating in real estate transactions — a move that will allow the company to tap an addressable market of more 11 billion euros ($12.4 billion), according to the company's estimates. JPMorgan has a price target of 67 euros on the company, which closed at around 52 euros on Feb. 13, representing a potential upside of 28.8%. Norwegian online classifieds group Adevinta is also favored by JPMorgan. The bank said the company now has an "attractive" portfolio with the integration of the eBay Classifieds business, which it had acquired in 2020 for $9.2 billion. Further portfolio optimization is expected ahead as the company pulls out of Australia, South Africa and Brazil, Diebel said. JPMorgan believes there is high visibility on the company's future growth. It has a price target of 107 Norwegian krone ($12) on the stock, which closed at 83 Norwegian krone on Feb. 13, implying a potential upside of 28.9%. Food delivery Within the food delivery sector, the bank sees continued strong order momentum in international markets that have reopened. German online food delivery service provider Delivery Hero is the bank's top pick in this space. The bank likes the company's focus on emerging markets and "leading position" in emerging new related business segments, noting that the company has consistently delivered strong top-line orders and transaction values across all markets in recent years. The bank has forecast more than 3.2 billion euros in net cash for the company at the end of fiscal year 2021 (FY2021), which will allow the company to compete in key markets or consolidate selected markets if opportunities arise, Diebel said. JPMorgan has ascribed a price target of 114 euros on the stock. Shares of Delivery Hero tumbled 29% on Feb. 10 following the release of a disappointing earnings guidance for the year — just a day after JPMorgan issued its outlook for the company. The stock has since pared some of its decline, closing at 43.27 euros on Feb. 14. The bank also likes British online delivery firm Deliveroo for its "strong traction" in Tier 2 cities and rural areas in the U.K. In addition, it believes the rapid rollout of services in Tier 3 cities remains underappreciated by the market. The company is expected to generate £1.3 billion in net cash by the end of FY2021, which the bank said will support the expansion of the company's various business initiatives. JPMorgan has set a price target of 201 pence ($2.72) on the stock, which closed at 141.4 pence on Feb. 14 — an implied potential upside of 42.1%. Advertising German advertising giant Ströer also makes JPMorgan's list, with the bank describing the company as the "leader" in Germany's out-of-home advertising space. Diebel said he is "excited" for the company's rollout of programmatic advertising and believes the company can integrate its online advertising and OOH platforms. "We believe Ströer still offers significant upside potential, and we see current multiples as undemanding, taking into account the potential for further growth in Ströer's main markets," Diebel added. JPMorgan has a price target of 86 euros on the company, which closed at around 68.4 euros on Feb. 13, representing a potential upside of 25.7%. Online education Game-based learning platform Kahoot! rounds off the JPMorgan list. The bank noted that the platform had grown its paid subscriptions at a compounded rate of 155% over the past three years as it benefited from the rise in home schooling. Nevertheless, the bank believes the platform remains "well-positioned" for growth even as markets reopen due to its initiatives in corporate training and content marketplace, Diebel said. The bank expects the company to generate $200 million in net cash by end-FY2021. JPMorgan has a price target of 40 Norwegian krone on the stock, representing a 30.3% upside to its closing price of around 30.70 Norwegian krone on Feb. 13.

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