In a previous column, which I wrote on Feb. 25 and was published on Feb. 27, I hypothesized that small-cap and mid-cap stocks would rally as they managed to obtain funding despite high interest rates, as the Street generally becomes more upbeat about equities, and as bears gave up shorting small-cap and mid-cap names.
On Feb 27, the Russell 2000, dominated by small-cap stocks, climbed 1.34% to within a percentage point of its highest level since October 2021, suggesting that my thesis could have some validity. I believe that similar, positive catalysts will propel the shares of many currently unloved tech stocks with strong, long-term outlooks higher.
Specifically, as a large number of these firms show that they are able to obtain capital, as their positive catalysts bear fruit, and as the Street becomes more upbeat about equities in general, the shares of these tech stocks will rally. Here are three such tech stocks to buy on weakness.
Roku (ROKU)
Roku (NASDAQ:ROKU) reported strong fourth-quarter results on Feb. 15 as its top line jumped 13.5% versus the same period a year earlier while it added 10 million net new accounts versus Q4 of 2022, bringing its total number of accounts to a very impressive 80 million. Also importantly, its operations generated $256 million of cash last year, up from just $11.8 million in 2022.
However, ROKU stock has crashed over 30% since the report. The Street is focusing on Walmart’s (NYSE:WMT) acquisition of one of Roku’s competitors, Vizio. In a note to investors on Feb. 27, Wells Fargo downgraded Roku to “underweight,” based on the idea that the retailer accounts for about one-third of the sales of Roku’s devices, while also generating a significant amount of its ad revenue.
However, I believe that these fears are way overdone. While Walmart will work hard to promote Vizio, Roku’s very high popularity and strong growth will prevent the retailer from refusing to sell Roku TVs or pulling its ads from Roku altogether. After all, I do not believe that Walmart will want to harm itself by missing opportunities to profit from consumers looking for Roku TV or by giving up opportunities to show ads to the company’s huge user base.
BlackBerry (BB)
BlackBerry (NYSE:BB) stock has tumbled 40% since Dec. 15. However, the firm, which specializes in IT security and providing software and operating systems for automobiles, plans “to maintain a positive net cash position throughout the coming fiscal year (which starts on March 1), and to be operating cashflow positive by” the last quarter of its upcoming fiscal year.
Also importantly, Ivy, BlackBerry’s middleware system for automobiles, appears to be gaining significant traction. I think of Ivy as an app store for automobiles because it will allow automakers to easily sell many apps to their customers.
Given how lucrative app stores have been for Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Apple (NASDAQ:AAPL), I believe that Ivy can be a game changer for BlackBerry. It’s surely one of those tech stocks to buy on weakness.
Very encouragingly, during a February interview, Tim Foote, BB’s head of Investor Relations, said “We have (proof of concept trials) now going on with some larger” automaker, while John Wall, the co-head of BlackBerry technology Solutions, reported that “I’m seeing (automakers) cooperating (with IVY) that I never thought I would see.”
Finally, BlackBerry is working on separating its slowly growing cybersecurity business from its auto unit which is expected to grow at a 20% annual clip, and had a $640 million backlog as of the end of last quarter while generating gross margins of 80%. I believe that the firm could be looking to generate huge value for shareholders by selling its cybersecurity unit, causing investors to focus on its hugely successful, high-potential auto unit.
Super Micro (SMCI)
Super Micro (NASDAQ:SMCI) has sunk 21% from its all-time high price of $1,077 as the street worries about its valuation and its decision, announced on Feb. 23, to issue $1.5 billion of convertible notes.
However, the shares’ forward price-earnings ratio of 28 times is quite attractive for this very rapidly growing company which is highly leveraged to the AI boom.
And the dilution caused by the issuance of its convertible bonds will soon be forgotten by large investors as the Street once focused on the huge demand for its hardware which facilitates the creation of AI.
Also noteworthy is that investment bank Rosenblatt hiked its price target on the shares to $1.300 from $700, citing the firm’s ability to benefit from the AI boom, along with market share gains which could reach an annualized 10% in the long term.
Rosenblatt believes that the company’s earnings per share could exceed $60 in fiscal 2026, up from the $22 that analysts, on average, expect this year. This makes it one of those tech stocks to buy on weakness.
— Larry Ramer
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Source: Investor Place