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Market strategist: 'Until we get capitulation, we won't see a bottom'

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Baird Technology Strategist Ted Mortonson joins Yahoo Finance Live to discuss the slides tech stocks are experiencing, investing in the software sector, growth in major companies developing emerging technologies, and Netflix's presence in the streaming space.

Video Transcript

- We've been tracking tech stocks very closely. They rallied back from the brink, as investors, they bought into the dip that we saw yesterday. And we're going to bring in Ted Mortonson here, who is the Baird Technology Strategist. Ted, help us kind of dive into whether it was a dip or whether it's a discount that some of the investors were latching onto and if this is the end of that dip.

TED MORTONSON: Well, first of all, thanks for having me. I think it was really a pretty big of a bear market had faith. In any cycle, and I've been doing technology for over 30 years, and I've seen one of the more senior guys on the street that have actually seen a fair amount of cycles, where we are in technology, in any cycle, you've got euphoria, complacency, a phase of concern, a phase of fear, and a phase of panic and capitulation.

Right now, where we are in the market, from an institutional standpoint, is a lot of PMs have been pretty much hurt specifically on software. And I would say we're kind of in that fear and panic area. And until we get capitulation, we won't see a bottom of the market.

- So when do we get to capitulation?

TED MORTONSON: That's a great question. I wish I had the clear crystal ball. But I think one of the things that the institutional investors are looking at is from a technical standpoint, there's been a fair amount of damage. And a lot of people are looking at one year charts. But they should be looking at five year charts.

And where the institutional parties are looking at is where we have actually some very, very good support. Listen, the macro, the tech macros, are very, very powerful. They haven't changed one iota. I think people are just looking for a reasonable entry point from a risk-reward standpoint.

- And so where are some of the best opportunities in tech right now? I mean, across the cloud I've been tracking Salesforce coming into this year. That didn't seem like a safe place. We've been tracking Nvidia. Some of the semis didn't necessarily seem like a safe place. So where within technology specifically would you be looking at?

TED MORTONSON: Well, right now, the IGB or the cloud index specifically dominated by a lot of high valuation software names. These names have actually been taken out to the woodshed. I've got some software names down anywhere from 25% to 35% this month. So these multiples have contracted almost 40%. And there are some very, very attractive buys in the software area.

And I think what's interesting is, from a historical standpoint, that 30% growth cohort, people are looking at like a 10 times EB to revenue multiple. We're getting very close to that. The 20% cohort with free cash flow is, where I'm starting to see a lot of institutional interest is in that seven to nine times EB to revs rate. And we're really getting pretty close to that area.

So from a software perspective, we've retraced a lot from the top. Unfortunately from a semiconductor standpoint, the SOXX, if you look at the SOXX, in the last two years, we've been up 94%. So I would say there's more downside from some of the checks that we are doing on lead times and Chinese consumer weakness and inventory builds, where we probably have a little bit more downside in the SOXX than we do in software.

- In terms of bets on emerging technology, you've highlighted your case on the metaverse. VRAR remains intact. How much of that is about the software play? How much of it is about the hardware and the headsets? And if that's the case, in terms of the latter, is it about the big players, like Meta with Oculus and then Apple and the anticipation of that release this year?

TED MORTONSON: That's a great question. And it is really becoming a big boys game. And the reason why is that from a silicon perspective, all these chips that are really focused on AI acceleration and cloud acceleration are really done at the next generation nodes. This is-- without getting too technical, this is at the 7, 5, and 3 nanometer node. The capital intensity at that level is massive as it relates to a tape out of a chip.

So the people with, I would say, huge balance sheets and very, very high R&D, like an Nvidia, or a Qualcomm, or an Apple, or an AMD, those are the companies very, very well positioned. From a software perspective, it's really an open field on designing into that cloud and that metaverse area.

So it's less defined, but quite frankly, the software add-ons could be a myriad of new software companies that are emerging. But one thing is in common. They all have an AI component or a machine learning component or a visual AI component.

- Ted, just while we would love to get your outlook, especially on the streaming sector. As we had heard from Netflix already with some of their projections for the future and their earning are quite frankly kind of laying out a grim scene, if you will, for the broader content space as it relates to streaming.

Is that something that you believe this is going to be an impact for some of the other players that are out there, as well, that have yet to release their earnings results? And how would you be playing the streaming space right now?

TED MORTONSON: Well, Netflix's quarter was a tough one to take. I think they were a little bit in denial that their core acquisition growth was decreasing a little bit. And also I think you have to look what's going on internationally. They had some problems in Latin America, as well as India. And I think it's just a game of saturation at this point.

It's the best company in the group. They've got a fantastic engine as it relates to content. It is getting more crowded as it relates to the amount of content coming on. But Netflix is by far I would say the cream of the crop in the group. And from an institutional standpoint, with the amount the stock has been down, the GARPy-- I would say GARPy growth guys are definitely kicking the tires on Netflix.

The other name that people continue to look at from an infrastructure standpoint is Akamai, not only because of their security business, which is growing in excess of 20%, but they do play into that streaming content macro.

- Ted, we're going to have to have you back on the show again soon as we continue to watch some of these tech earnings. Ted Mortonson, Baird Technology Strategist joining us today.

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