In this piece, we will take a look at the technology stocks that Roth MKM is cautious about.

The technology industry has driven the stock market at a time when interest rates were at two-decade-high levels. At the heart of the surge is artificial intelligence which has pushed some stocks to record highs. To understand the impact of AI on the broader stock market and technology stocks in particular, consider the performance of the flagship S&P stock index, the wider NASDAQ index, and the mega cap-focused component of the NASDAQ. Since OpenAI announced ChatGPT for public use in November 2022, the three stock indexes have gained 49.5%, 64%, and 71%, respectively.

This index performance provides us with two key insights into what has driven the stock market’s performance over the past two years. Firstly, the difference between the performance of the tech-heavy stock index and the flagship S&P indicates that technology stocks have driven the market. To verify this assumption, consider the performance of the S&P’s banking and energy stock indexes. Over the same time period, these indexes have gained 22% and 5.7%, respectively. These two are amongst the largest non-tech stock market sectors and while tech has soared, their returns have lagged.

The second insight is the absolute dominance of mega-cap technology stocks. This insight comes through the performance of the mega-cap-focused NASDAQ index. It leads the broader, and already tech-heavy, NASDAQ index by seven percentage points and has been dominated by the performance of Wall Street’s favorite AI GPU designer whose shares have gained 749% since ChatGPT’s public release. As for the other Magnificent 7 stocks, shares of the EV maker are up 76%, those of the firm behind Windows have gained 62%, the search engine provider’s stock is up 75.8%, the social media company is up by 349%, the eCommerce retailer has gained 115%, and the iPhone-maker is up by 55%.

As a result, it’s clear that technology stocks are playing a large role in driving the stock market’s performance. So, it merits taking a deeper look at their performance, understanding what the future holds for them, and analyzing how they might be positioned to respond to fast-growing technology trends such as autonomous driving and artificial intelligence.

One firm that has worked closely with technology stocks and engaged in investment rounds for technology startups is the investment bank Roth MKM. The firm claims to have “raised over $60 billion for small-cap public companies since 1992,” through “services including IPOs, Follow-ons, Secondary Sales, Private Placements, ATMs and M&A Advisory.” The firm’s analysts have been busy sharing their thoughts on some of the biggest technology companies this year.

For instance, Roth analyst Rohit Kulkarni shared his thoughts on CNBC about Jeff Bezos’ eCommerce and cloud computing company in July. He outlined that the firm’s Amazon Web Services (AWS) CEO Matt Garman “at a spot where he needs to prove out that AWS, the leader in cloud, can maintain the leadership in AI, uh, in the next three to five years.” 2024 so far had seen the firm shift the narrative around AWS where investors were slowly warming up to the fact that it could lead in AI and the firm was “playing catch up,” outlined the Roth analyst. He went on to share the key watch-out points on investors’ minds as the year started and what they will evaluate moving forward.

According to Kulkarni, “there were two biggest questions coming into 24 for Amazon. Can they provide accelerating growth in AWS? Yes, they did. And second biggest question was can they demonstrate rising profitability in both North America and international retail? Yes they did. And we are approaching probably record high margins in retail in the next six to nine months. That’s what is, something that investors strongly believe who are bullish in Amazon that retail profitability is going to help it, help go beyond what we even saw in 2018, 19 levels. So that’s a fundamental restructuring of the business that Andy Jessy has kind of orchestrated and that is going to help the stock. While doing that, AWS narrative is slowly shifting in their favor. So both the pillars in Amazon’s growth engine are starting to fire while they are outperforming on advertising, while they are including new layers of growth. Like supply chain as a service, healthcare related new thing.” Consequently, the analyst concluded that we like the firm “over the next, not just six months, but probably into 25.”

Another firm that has been in the news is Elon Musk’s car company. While its shares have been affected by the slow EV market in 2024, the outcome of the election injected fresh life into the stock. From the start of the year until the day of the election, the stock was down 2.2%. Now, it is up 36% year-to-date after having gained 39% since the election. Roth’s senior analyst Craig Irwin shared some insights for this firm recently. Along with being an EV company, the firm is also a key player in the autonomous driving industry. The autonomy potential, aided by copious amounts of data and training resources, is also baked into the stock. According to Irwin, the firm’s decision to rely on cameras instead of LiDAR sensors can prove to be tricky.

He believes “technologically, it’s possible, doable. But the economics don’t come together when you’re actually burning twice as much electricity to get from A to B. The compute, the cost of compute is high.” However, he is a “big believer in the future long-term of autonomous, but it’s not going to be an app update of the existing fleet. And these are going to be very different vehicles when they get out on the road.” Consequently, after factoring in error rates as well, the analyst is “a heavy skeptic” who believes that “if we do see, you know, a Waymo-like vehicle, it’ll be another five years.”

So, as Roth MKM keeps a close eye on the technology sector, we decided to look at which technology stocks the firm is wary of. In a recent note, the firm shared that “We are not downgrading Technology. In our view, downgrades call for immediate selling.” But it cautioned that it is “starting to see more charts losing upside momentum, but our work also shows many names have yet to reach their ‘stop loss’ levels on the chart. We are aware of the leadership this group has provided the market over the last two years but in the near term, we anticipate this sector performs in line with the overall market.”

Our Methodology

To make our list of Roth MKM’s technology stocks to be cautious about, we ranked stocks part of its recent report by the number of hedge funds that had bought the shares in Q3 2024 in descending order.

For these stocks, we also mentioned the number of hedge fund investors. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).

15. Microsoft Corporation (NASDAQ:MSFT)

Number of Hedge Fund Holders In Q3 2024: 279

Microsoft Corporation (NASDAQ:MSFT) is the world’s biggest consumer operating system company which also has a foothold in the cloud computing industry. Its hypothesis is driven by enterprise cloud spending, and in the AI era, it means that the firm has to drive AI-generate profits in the business or risk bleeding valuation. Microsoft Corporation (NASDAQ:MSFT) has invested billions of dollars in OpenAI, which has made the need to generate AI profits indispensable to the firm’s hypothesis. In fact, investor worries about the firm’s ability to rapidly generate profits have driven the share price in 2024. From the start of the year to the start of July, Microsoft Corporation (NASDAQ:MSFT)’s shares had gained 26%. However, since then, the stock is down 11.5%, as the stock sank by 3.1% in after-market trading following the firm’s first fiscal quarter results. These saw Microsoft Corporation (NASDAQ:MSFT) guide midpoint Q2 cloud revenue growth at 31.5% which was lower than the 32.25% that analysts were expecting.

Baron Opportunity Fund mentioned Microsoft Corporation (NASDAQ:MSFT) in its Q3 2024 investor letter. Here is what the fund said:

“Microsoft was traditionally known for its Windows and Office products, but over the last five years it has built a $147 billion run-rate cloud business, including its Azure cloud infrastructure service and its Office 365 and Dynamics 365 cloud-delivered applications. Shares gave back some gains from strong performance over the first half of this year. For the fourth quarter of fiscal year 2024, Microsoft reported a strong quarter with total revenue growing 16%, in line with the Street; Microsoft Cloud up 22%; Azure up 30%; 43% operating income margins; and 36% free cash flow margins. Core Azure growth came in one point shy of expectations, however, due to a soft European market and continued constraints on AI compute capacity. In the same vein, while Microsoft reiterated its fiscal 2025 targets of double-digit top-line and operating income growth, quarterly guidance called for Azure growth to slow a bit before accelerating in the back half of the fiscal year, as capital expenditures increase, yielding an expansion of AI compute capacity. We believe this investment is a leading indicator for growth, with more than half of the spend related to durable land and data center build outs, which should monetize over the next 15-plus years. We remain confident that Microsoft is one of the best-positioned companies across the overlapping software, cloud computing, and AI landscapes, and we remain investors.”

14. Adobe Inc. (NASDAQ:ADBE)

Number of Hedge Fund Holders In Q3 2024: 123

Adobe Inc. (NASDAQ:ADBE) is one of the biggest providers of productivity software in the world. Its products such as Photoshop and Reader are among the most widely used worldwide. Since it’s a software company, Adobe Inc. (NASDAQ:ADBE) relies to a large extent on subscription revenue to drive its hypothesis A software-centric business model enables the company to keep costs low and drive margins higher. The ability of AI to inject fresh life into the productivity software market has also meant that Adobe Inc. (NASDAQ:ADBE) has to deliver AI features to customers and drive revenue or lose share price momentum. Adobe Inc. (NASDAQ:ADBE)’s latest major share price movement, which took place in September, saw the stock tumble by 13% after the firm’s fourth-quarter guidance missed analyst estimates and made Wall Street trim down some of the AI optimism.

Polen Capital mentioned Adobe Inc. (NASDAQ:ADBE) in its Q2 2024 investor letter. Here is what the fund said:

“With Adobe, in some ways, we see it as a microcosm of the market’s “shoot first, ask questions later” approach to categorizing AI winners and losers. In the early part of last year, Adobe came under pressure with a perception that generative AI (GenAI) would represent a material headwind to their suite of creative offerings. In short order, the company introduced its GenAI offering, Firefly, which shifted the narrative to Adobe as a beneficiary with a real opportunity to monetize GenAI in the near term. Earlier this year, that narrative was again challenged as the company reported a slight slowdown in revenue growth. Results in the most recent quarter were robust as the company raised its full-year forecast across a number of key metrics and showcased better-than-expected results.”