Investor says tech has yet to bottom — and reveals the mega-cap stocks to avoid

Published Sun, Feb 26 20237:38 PM EST

Tech stocks have been on the up this year; the Nasdaq Composite is the best-performing Wall Street index, up around 11% since the start of 2023. But tech investor Mark Hawtin believes the sector's resurgence is nothing more than just another bear market rally. "The unexpected trajectory of inflation really drove concern, and that hits long-duration stocks most. And in some cases, very good companies fell 70 or 80%. We have seen a recovery in the first part of this year, but I think that really reflects the excessive sell-off in 2022. I don't think it necessarily marks the bottom quite yet," Hawtin, investment director at GAM Investments, told CNBC Pro Talks on Wednesday. While the FAANG grouping — Facebook (now Meta) , Amazon , Apple , Netflix and Google(now Alphabet ) — may be a popular choice for many investors, it is important to identify the "true disruptive" growth businesses from the ones that are not, according to Hawtin. Too mature? Within the FAANGs, he believes the likes of Meta and Alphabet are now "quite mature businesses," with their reliance on advertising revenue making them risky bets against the backdrop of a difficult macro landscape. "At the end of the day, Google and Facebook are advertising businesses, they use technology to run their platforms, but they are dependent on advertising," Hawtin said. "Therefore, if we see a downturn in the economy, there will be a downturn in advertising, and that must have an impact on companies." Earlier this month, Meta reported a third straight quarter of declining sales , with ad revenue, which accounts for nearly 97% of total revenue, falling to $31.2 billion in the fourth- quarter from $32.6 billion a year before. It was a similar story at Alphabet , which reported $59 billion in advertising revenue for the fourth quarter, a decrease of 3.6% from the same period in 2021. Both Meta and Alphabet are attempting to weather one of the most challenging environments for their core advertising businesses in recent years, as the specter of a recession continues to weigh on businesses and negatively impact advertising spending. Both companies have been attempting to diversify in recent years — though these initiatives remain in infancy. Meta's bet on the metaverse is far from bearing fruit , with its Reality Labs division, home to the company's virtual reality technologies and projects, posting a $4.28 billion operating loss in the fourth quarter. Meanwhile, Alphabet has jumped on the artificial intelligence bandwagon with the announcement that it is working on a ChatGPT competitor named Bard. But a series of early missteps around the announcement pushed the stock price down nearly 9%, highlighting the challenge of rolling out its AI search tool. Analysts, however, continue to be largely bullish on both stocks. About 88% of analysts covering Alphabet rate it a "buy," and give it average upside of 36.3%. Meta is also well-liked by analysts, with 67% of its analysts giving it a buy rating, and potential upside of 19.3%. — CNBC's Michael Bloom contributed to reporting