In this article, we will take a look at the 8 best tech stocks to buy according to Bank of America. You can skip our analysis of the bank’s overall outlook on the tech sector and go directly to the 4 Best Tech Stocks to Buy According to Bank of America.
In a detailed note issued to investors on Friday, June 3, the equity research and strategy team at Bank of America highlighted eight top stock picks from the tech sector. According to Savita Subramanian, Head of US Equity Strategy and Quantitative Strategy, the right time to buy tech stocks is when nobody is asking for them. She adds that after the dot-com bubble of the early 2000s, it has taken a long time for the tech stocks to reach a bottom. When the dot-com bubble burst, investors stopped taking an interest in tech stocks. However, this time around, the interest is persisting as the valuation of growth stocks is expensive.
Jill Carey, Head of US Small and Mid-Cap Strategy at BofA, thinks that there is a complex environment for tech stocks. The late stage of the economic cycle is in progress, but there are still opportunities on an individual stock level despite the sell-off in the last few months. In the note, the analysts broke down the tech sector into various industries and gave their expert insights into them. For the companies involved in the business software industry, the team at Bank of America prefers enterprise software companies with large market capitalization and those providing growth at a reasonable price (GARP). The investment firm has abandoned money-losing companies for growth opportunities and has shifted its focus to stocks that are providing free cash flow (FCF) growth.
Meanwhile, for chip manufacturing companies, Bank of America thinks that the sales have peaked for the current business cycle. A significant dip can be expected in the next three to four quarters, making it a risky industry. The networking and cybersecurity companies are expected to face supply chain-related concerns until next year before any improvement in conditions.
There is a split between e-commerce and internet stocks. If the US avoids a recession, companies like Amazon.com, Inc. (NASDAQ:AMZN), Airbnb, Inc. (NASDAQ:ABNB), DoorDash, Inc. (NYSE:DASH), and Snap Inc. (NYSE:SNAP) that have gained market share in the last two years are likely to outperform. In contrast, in case of a recession, companies like Alphabet Inc. (NASDAQ:GOOG), Match Group, Inc. (NASDAQ:MTCH), and Meta Platforms, Inc. (NASDAQ:META) should be included in the portfolio as these companies could reduce their spending and shift their focus towards profitability. According to BofA, the hardware industry is in the worst position among all the industries as they are the most impacted by the late-stage business cycle and the economic downturn.
Our Methodology
Bank of America highlighted eight small and mid-cap tech stocks that offer an average upside potential of 45%. We will discuss the investment thesis provided by the bank for these stocks and also take a look at how many hedge funds have a holding in these companies as of March 31. Insider Monkey maintains a database of 912 hedge funds as of Q1 2022.
Best Tech Stocks to Buy According to Bank of America
8. DoorDash, Inc. (NYSE:DASH)
Stock Price as of June 9: $73.79
Number of Hedge Fund Holders: 52
DoorDash, Inc. (NYSE:DASH) is a San Francisco, California-based company that has an online delivery platform connecting local and national restaurants and customers. The company went public in December 2020.
DoorDash, Inc. (NYSE:DASH) stock had an initial public offering price of $102 and reached a peak of $240 before retracting. Bank of America thinks that the company has been able to gain market share during 2021 and 2022, despite growth decelerating and coming in line with industry numbers and its competitor Uber Eats. A few quarters ago, DoorDash, Inc. (NYSE:DASH) reported triple-digit growth. Michael McGovern at Bank of America has given DoorDash, Inc. (NYSE:DASH) stock a Buy rating and a price target of $105.
The company is cash-flow positive and finished Q1 2022 with $3.7 billion of cash and investments, which is equivalent to 15% of the market value. DoorDash, Inc. (NYSE:DASH) does not want to restrict itself as a marketplace for food delivery only but wants to expand itself into local commerce by entering the alcohol, flower, gifts, convenience, pet, and other retail categories. Furthermore, DoorDash, Inc. (NYSE:DASH) is also considering entering new markets.
7. GitLab Inc. (NASDAQ:GTLB)
Stock Price as of June 9: $50.35
Number of Hedge Fund Holders: 30
GitLab Inc. (NASDAQ:GTLB) is a San Francisco, California-based provider of DevOps platforms with 30 million registered developers and more than one million active license users. Meanwhile, the size of the active contributor community stands at around 2,500. The open core company has become part of 100,000 organizations globally.
Brad Sills, Koji Ikeda, and Michael Funk at Bank of America have given GitLab Inc. (NASDAQ:GTLB) stock a price target of $65. The analysts think that the company has the potential to achieve more than 50% growth in the medium term. It has a visible path to an inflection point of positive operating income as the business delivers high growth and is experiencing an expansion in margins, higher than the consensus estimates. According to experts, GitLab Inc. (NASDAQ:GTLB) is considered to have the most comprehensive product offering in the DevOps software market.
Here’s what ClearBridge Investments said about GitLab Inc. (NASDAQ:GTLB) in its Q4 2021 investor letter:
“We attribute this success to our experience following and investing in companies for years in the private markets. This familiarity allows us to model the business out several years to understand the serviceable market, how a company’s product or service will lead to market share dominance, project the potential returns and assess the profitability of the business. We looked at a number of companies in 2021 and questioned whether this product fit existed. In the end, we moved forward with investments in businesses with strong dependable revenue streams with high renewal rates where we believe the end user will return and consume more of the company’s offerings. From a fundamental standpoint, we target companies that are cash flow positive or very close to it and are led by strong, entrepreneurial managements in industries we know and have been successful in such as software, payments, consumer and health care.
Several of the IPOs we participated in during the fourth quarter illustrate these qualities.
Gitlab is a designer of software for a rapidly growing area of IT operations: development, security and operations (Dev/Sec/Ops) for software developers. We started following the company in 2018, did a full due diligence during its last venture round before coming public and became convinced it had a highly recurring and disruptive business with a very long runway for future growth. Gitlab has established a broad platform of software tools required by developers to write code, package it, secure it and deploy it. We see the company as the more innovative in a twohorse race with Github, a division within Microsoft, in the Dev/Sec/Ops market. While the shares came out at a difficult time for high growth disruptors, we believe Gitlab has a compelling secular growth trajectory.”
GitLab Inc. (NASDAQ:GTLB) was held by 30 hedge funds at the end of Q1 2022.
6. Udemy, Inc. (NASDAQ:UDMY)
Stock Price as of June 9: $12.91
Number of Hedge Fund Holders: 7
Udemy, Inc. (NASDAQ:UDMY) is a San Francisco, California-based online course provider for students and professionals. The marketplace brings together 65,000 teachers and 44 million learners through more than 183,000 courses. The global presence and brand recognition make the platform recognized by leading Fortune 500 organizations. Professionals design online courses according to the demand of the learners.
Nat Schindler and Nafeesa Gupta at Bank of America have given Udemy, Inc. (NASDAQ:UDMY) stock a price target of $34. The analysts think that Udemy Business (UB) is an under-appreciated growth driver which is gaining momentum and improving continuously. The contribution of the segment is expected to reach 50% by Q1 2022 as opposed to 43% in Q1 2022. Although Udemy, Inc.’s (NASDAQ:UDMY) consumer segment is experiencing a slowdown following the ease in lockdowns along with the possibility of ‘Zoom fatigue,’ the UB business segment is expected to pull in revenues with strong margins. Udemy, Inc. (NASDAQ:UDMY) stock has lost nearly 60% of its IPO price and provides an attractive opportunity to potential investors.
As of Q1 2022, Udemy, Inc. (NASDAQ:UDMY) was held by 7 hedge funds.
5. ON Semiconductor Corporation (NASDAQ:ON)
Stock Price as of June 9: $63.81
Number of Hedge Fund Holders: 48
ON Semiconductor Corporation (NASDAQ:ON) is a Phoenix, Arizona-based semiconductor supplier corporation that supplies 80,000 different parts to leading industries like automobile, aerospace and defense, cloud computing and 5G solutions, internet of things, and medical solutions. The firm has a headcount of 33,000 employees globally, with 43 design sites in 19 countries.
The recent global chip shortage has brought companies like ON Semiconductor Corporation (NASDAQ:ON) into the limelight. Vivek Arya, Jamie Zakalik, and Blake Friedman at Bank of America have given ON Semiconductor Corporation (NASDAQ:ON) stock a price target of $80. The analysts think the stock is a turnaround plan as it offers a superior Silicon Carbide product and has the best exposure to high-growth markets like the electric vehicle industry. ON Semiconductor Corporation (NASDAQ:ON) is a market leader in image sensors and power semiconductor products, which are integral for designing environmentally friendly and energy-efficient equipment. The company is abandoning low-margin opportunities and focusing on high-margin businesses. Gross margin increased from 45.1% in Q4 2021 to 49.1% in Q1 2022 as ON Semiconductor Corporation (NASDAQ:ON) increased its average selling price (ASP) and lowered its cost.
Artisan Partners mentioned ON Semiconductor Corporation (NASDAQ:ON) in its Q4 2021 investor letter. Here’s what the investment management firm said:
“ON Semiconductor is a global supplier of advanced semiconductors for sophisticated electronics applications within the automotive, industrial, communications, consumer and computing end-product markets. The company operates across three segments: power solutions, advanced solutions and intelligent sensing. A new management team, which took over toward the end of 2020, is working to dramatically improve the company’s performance by rightsizing its manufacturing footprint, exiting more commoditized products and investing in several compelling growth opportunities. When the dust has settled, we expect the portfolio to be more focused on the auto and industrial segments. As auto OEMs incorporate more automated safety technology and car fleets transition from internal combustion engines to battery electric vehicles, ON’s image sensors for cars and silicon carbide inverters— which extend EV battery efficiency—will be in high demand. This mix shift should drive ON’s margins higher over time. With shares trading at an attractive valuation, we initiated a GardenSM position.”
Of the 912 hedge funds in Insider Monkey’s database, 48 funds held a stake in ON Semiconductor Corporation (NASDAQ:ON) as of Q1 2022. In addition to ON Semiconductor Corporation (NASDAQ:ON), tech stocks such as Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc. (NASDAQ:GOOG), and Meta Platforms, Inc. (NASDAQ:META) are popular among the hedge funds.
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Disclose. None. 8 Best Tech Stocks to Buy According to Bank of America is originally published on Insider Monkey.
