For the vast majority of 2022, tech stocks have been pummeled, in part due to rising interest rates and Russia’s invasion of Russia. Ukraine ends up with a “no risk” scenario. Many investors have gone into sell mode, but according to Wedbush Securities analyst Dan Ives, smart investors should focus on companies that have “significant free cash flow”, like Microsoft. (NASDAQ: MSFT)Apple (NASDAQ:AAPL)Salesforce (NYSE: CRM).
In a note to clients, Ives said ‘geopolitical shock events’, such as the situation now playing out between Russia and Ukraine, have traditionally not been a time to panic, but to pick up stocks. oversold high quality products that are discarded. with the proverbial bath water.
“We believe large-cap tech will outperform small-caps [along with] a spin to technology mainstays with a defensive business model and high [free cash flow]“, Ives said.
In addition to the aforementioned names, Ives noted that Oracle (NYSE: ORCL)Adobe (NASDAQ:ADBE)“basic chip names” and several cybersecurity stocks, such as Palo Alto Networks (NASDAQ: PANW)Crowd (NASDAQ:CRWD) and others are the “safest games in this turmoil”.
Other cybersecurity names mentioned positively by Ives include Zscaler (NASDAQ:ZS)Tenable (NASDAQ:TENB)Varonis (NASDAQ: VRNS)Fortinet (NASDAQ:FTNT)CyberArk (NASDAQ: CYBR)Checkpoint (NASDAQ:CHKP) and Sailpoint (NYSE: SAIL).
Apple (AAPL) is perhaps the best example of a company with strong cash flow, as it generated nearly $47 billion in operating cash flow in its last quarter, a record for the company headed by Tim Cook.
Microsoft (MSFT) is another strong example, generating $14.5 billion in operating cash flow in its latest quarter and $8.6 billion in free cash flow, even as the company spends significantly to develop its cloud business, Azure.
Oracle (ORCL), which just reported earnings, said operating cash flow for the last 4 quarters was $10.4 billion and its free cash flow over the same period was 6, $6 billion. Both results were, however, impacted by a one-time litigation charge in the second quarter.
Despite strong cash results, shares of all three companies have fallen this year, with Apple (AAPL) down 13%, Microsoft (MSFT) down 14% and Oracle (ORCL) down nearly 15%.
Most of the other companies did not fare any better, with only Palo Alto (PANW) and CheckPoint (CHKP) posting positive year-to-date returns.
Ives explained that tech stocks are the “most oversold” since 2014 and 2015, and investors are selling in “accelerated fashion.” This may work for some pockets of technology, but those that were sold off due to the Russian invasion, like Apple (AAPL), Microsoft (MSFT), emphasize the need for “defensive technology”. Most of these companies have pulled out of Russia, led by Apple (AAPL), and in the “worst case scenario” they will see a 1-2% drop in revenue as the situation is brought under control.