The Nasdaq is down more than 10% this year. Here are Wall Street's top picks to buy the dip

Published Sun, Mar 20 20227:48 PM EDT

As tech stocks endure a broad sell-off this year, Wall Street analysts name some of their top stocks to buy in the dip. The tech-heavy Nasdaq Composite has dropped into correction territory, with a decline of over 11% this year. That compares to a 6% decline for the broader S & P 500. High-growth tech names have been slammed by the prospect of interest rate hikes and the Federal Reserve's policy pivot. This has been compounded by Russia's invasion of Ukraine and a disappointing set of fourth-quarter results, UBS' strategists, led by Vincent Heaney, said on Mar. 14. Facebook parent Meta was one of several big-tech companies that reported disappointing earnings in February. Other tech names that below-expectation results include streaming giant Netflix and fintech titan PayPal . Despite the challenging backdrop, UBS says there are "select opportunities" in the tech space. "While near-term volatility may persist, we expect valuations to stabilize and strong earnings growth to be reflected in share prices over the next 12 months," Heaney said. "We favor investing in quality tech stocks that have strong cash flows and recurring revenues, the ABCs of tech and 5G+ enablers," he added. The "ABCs of tech" refers to artificial intelligence, big data and cybersecurity. UBS expects this theme to register annual revenue and earnings per share growth of 10% and 16%, respectively, into 2025. The bank has forecast the AI market to grow at an annual rate of 20% to reach $90 billion by 2025 and expects global data usage to expand exponentially into 2030. The bank also sees immense potential in cybersecurity as cybercrimes mount. Tech outperformers Investment bank Baird also has highlighted a number of tech themes and stock picks it thinks are "well-positioned" as relative outperformers in the sector. Read more Tech analyst says buy the dip on Microsoft — and names the other tech stocks he likes The bank's analysts, led by Tristan Gerra, noted that "solidly entrenched" inflation will bring about changes in consumers' patterns and accelerate migration to more energy-efficient transportation, work-at-home trends, and digital entertainment. Within the internet and interactive entertainment space, the bank likes online marketplaces Amazon , eBay and Google (owned by Alphabet ) for their resilience against inflation and views them as relative "safe havens." The bank also sees interactive entertainment as an attractive sector in times of inflation as people "cocoon" at home. Its top picks in this space are video game publishers Electronic Arts and Take-Two . Gerra said he believes rising energy prices will accelerate consumers' transition to hybrid and electric vehicles, which will benefit stocks such as STMicroelectronics , ON Semiconductor and Navitas Semiconductor . Meanwhile, the pandemic-induced work-from-home trend will continue to fuel demand for high-end notebooks, gaming devices, robust internet/5G communication, Internet-of-Things and displays, Gerra said. The bank's top picks within the space include a host of chip makers that include Qualcomm , Intel , Advanced Micro Devices , Nvidia , Broadcom and Skyworks Solutions . Baird is positive on cloud software, with the bank viewing the sector as "well-positioned" to weather inflationary pressures due to "very little" supply chain cost exposure. The bank's favorite stocks in this sector are Five9 , Zoom , Twilio and RingCentral . The bank also likes "vertical software" — software developed to serve a specialized vertical or industry — which it says has "historically outperformed" during periods of inflation. "We highlight ideas that provide mission critical products (high gross retention, pricing power), enable productivity to combat inflationary pressures, and/ or are exposed to end-markets where spending is more "protected" from broader macro forces," Gerra said. His picks include Manhattan Associates and SPS Commerce for their respective leadership in warehouse management and fulfillment technologies. Baird also noted that R & D spending on electronic design automation has remained resilient as semiconductor chip designs continue to evolve. The bank sees Cadence Design Systems and Synopsys as well-positioned within this space given their strong pricing power. A perfect storm Wedbush's Dan Ives believes that a "perfect storm" continues to brew for Big Tech, with "nowhere to hide." His top pick in the sector is Apple , which he views as a "Rock of Gibraltar defensive tech name" as well as "the best 5G tech play in the market." He has a price target of $200 on the stock, which represents a 24.5% potential upside to its closing price of $160.60 on Mar. 17. Ives favors large-cap tech names and a rotation into the tech stalwarts with defensive business models and high free cash flow. Amid the extended sell-off in the sector, he favors owning software names such as Oracle , Adobe and Salesforce . Ives also likes the cybersecurity sector given the "significantly elevated level" of cyber attacks now on the horizon. His top picks for exposure to cloud cyber trends include Palo Alto , Zscaler , Crowdstrike , Tenable , Varonis , Fortinet , CyberArk , Palantir and Sailpoint . Lower for longer On Mar. 15, Wells Fargo's analysts led by Michael Turrin said of the tech sell-off: "We recommend starting with the highest quality franchises and are tending towards those business with strong platform positioning, balanced growth profiles, and management teams with proven track records." He prefers large-cap incumbents with strong free cash flow in a "low for longer" defensive macro environment, as well as stocks poised to show significant rebounds in performance when macro worries subside. The bank likes Microsoft as the "best way" to play the broad secular trend towards software, and Workday for its "improving demand" across multiple segments of the business segments. Intuit also makes Wells Fargo's list as a "US-centric and generally more defensive" business. The bank said the company is becoming better diversified while also delivering more "pronounced upside" in its recent results.

Signage at the entrance to the Intel headquarters in Santa Clara, California, U.S., on Tuesday, Oct. 19, 2021.

David Paul Morris | Bloomberg | Getty Images

As tech stocks endure a broad sell-off this year, Wall Street analysts name some of their top stocks to buy in the dip.