The market’s big headline to start 2019 was that tech juggernaut Apple (NASDAQ:AAPL) cut its first-quarter guidance because the world’s hottest economy, China, is rapidly slowing. The news chopped off 10% from an already beaten up Apple stock. It also brought the tech-heavy Nasdaq down 2%.
That makes sense. A lot of tech stocks have exposure to China. As such, if a monster like AAPL of them all is reporting considerable weakness in China, chances are high that almost every other tech stock is having trouble in China, too.
But, this doesn’t universally apply to the whole Nasdaq. There are a handful of tech stocks out there that don’t have any exposure to China. Yet, these stocks were also being sold off due to widespread and indiscriminate selling as a result of Apple’s weak guide.
From this perspective, there is opportunity in the early 2019 rubble. Broadly speaking, China is slowing rapidly, and that is significantly hurting Apple’s business. Every tech stock is dropping in response. But, there’s a handful of tech stocks that don’t have exposure to the rapidly slowing China economy. These are the stocks that are worth taking a look at during this sell-off.
With that in mind, let’s take a look at seven tech stocks that do not have China exposure.
At the top of this list is arguably the most troubled big tech stock in the market. But, it is also a big tech stock that has zero exposure to the China market.
It was a rough 2018 for Facebook (NASDAQ:FB). The social media and digital advertising giant was hit with a flurry of problems ranging from regulation to slowing growth to rising costs. All together, Facebook stock dropped about 25% in 2018, and currently trades at its lowest level in two years, and its all-time lowest valuation.
Because there has been so much weakness in Facebook stock, further weakness will need to actually be warranted by a drop in the fundamentals, not a drop in sentiment. Fortunately, the biggest fundamental risk to stocks right now is exposure to a rapidly slowing Chinese economy. Facebook has no such exposure, since its digital properties are largely blocked in China.
As such, with Facebook stock, you have a really beaten up stock trading at an all-time-low valuation, with zero exposure to one of the market’s biggest risks right now. That seems like an attractive combo which should provide downside protection for the foreseeable future.
Alphabet (GOOG, GOOGL)
Much like Facebook, digital advertising giant Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) had a rough 2018 due to regulation fears, slowing growth and rising costs. Also much like Facebook, GOOG stock now trades at a multiyear low valuation, yet has limited exposure to the China economy due to the Great China Firewall.
That is an attractive combination which implies healthy downside protection for the foreseeable future. But the upside thesis is from the notion that the sum of this company’s growth initiatives are being undervalued by the market.
We all know Google Search as the backbone of the internet. That positioning in and of itself is extremely valuable, and means the digital ad business is a stable growth machine. But, beyond that, Alphabet is also a leader in the nascent and rapidly growing AI, cloud, IoT, and self-driving markets.
With the stock trading at its lowest forward earnings multiple since 2016, the current valuation doesn’t seem to reflect much optimism regarding this company’s promising growth narrative. As such, the risk-reward on GOOG stock skews towards the upside here, especially with the stock closing in on a historically strong support level at $1,000.
Much like Facebook and Alphabet, social media company Twitter (NYSE:TWTR) does not have a presence in China. Also, unlike Facebook and Alphabet, Twitter’s growth rates and margins have actually been on an upward trajectory over the past several quarters.
Yet, despite having zero exposure to one of the market’s biggest risks and coming off off a multi-quarter streak of revenue growth acceleration and margin expansion, Twitter stock has been hugely beaten up over the past several months. Since July 2018, the stock has fallen 40%.
There are two big culprits behind the sell-off: user drops and valuation. User drop concerns are overstated. The company’s monthly active user base has dropped for two consecutive quarters, yet revenue growth has accelerated higher in each quarter. The reason for this is that the company is deleting “fake accounts.” That is technically shrinking the user base, but it’s also making it more authentic and valuable. Thus, ad revenues are still climbing, and that’s all that matters.
On the valuation front, Twitter’s trailing P/S multiple has dropped from 14 in July 2018, to a much more industry-average level around 7.8 today. Thus, with user drop and valuation concerns now behind it, Twitter stock looks ready to bounce back from this sell-off.
When you think about e-retail and cloud giant Amazon (NASDAQ:AMZN), you usually think about a company with global growth exposure. But, thanks to China’s own versions of Amazon, Alibaba (NYSE:BABA) and JD (NASDAQ:JD), Amazon has a very small presence in China.
Thus, the overall health of the Chinese economy doesn’t really impact Amazon’s ongoing operations. Instead, what impacts Amazon’s operations are the health of more developed markets like the U.S., Canada and Europe. Apple’s big update included some reassuring comments about developed market strength, while developed market economic data still remains broadly positive. Also, the 2018 holiday season appears to be have been a robust one, especially on the e-commerce front. The ad business continues to gain traction, and the cloud business remains the head-and-shoulders leader in a secular growth market.
All together, the fundamentals underlying AMZN stock remain favorable, despite a slowdown in China. At current levels, Amazon stock is trading at a multiyear low valuation. A multiyear low valuation on top of still-favorable fundamentals is a winning combination which should power Amazon stock higher in the near-to-medium term.
Much like Amazon, Shopify (NYSE:SHOP) is an e-commerce company with robust exposure to developed markets like the U.S. and limited exposure to developing markets like China. Given Apple’s comments regarding emerging market weakness and developed market strength, this is a favorable position to be in given the current global economic environment.
The near-term bull thesis on SHOP stock is compelling. This is a 50%-plus revenue growth company with expanding margins that just recently turned the corner into consistent profitability. Growth isn’t slowing by all that much, and analyst estimates have been consistently moving higher. Despite all that, the stock trades at its lowest P/S multiple since March 2017 — right before the stock doubled over the next six months.
The long-term bull thesis is even more compelling. The world is becoming more digital and more decentralized than ever before. Shopify exists in the overlap of these two trends. The company provides e-commerce solutions for retailers of all shapes and sizes, and in so doing, essentially serves as the e-commerce version of a storefront. Eventually, all retailers will need an e-commerce storefront, and most of them will turn to Shopify. Competition is muted. Growth is big. Gross margins are high. There’s lot to like here if you’re a long-term investors with a multiyear horizon.
One of the more obvious choices for this list is global streaming giant Netflix (NASDAQ:NFLX). Netflix doesn’t have a China presence, but they have a huge and rapidly growing presence everywhere else. Also, given Netflix’s price advantages over linear television packages, a global economic slowdown could actually help accelerate global Netflix adoption, especially in emerging markets.
As such, Apple’s big warning about rapidly slowing growth in China and other emerging markets isn’t big news for Netflix. Instead, the big news here is that Netflix’s original content continues to get better, more innovative, and more watched than ever before. For example, Black Mirror: Bandersnatch is a revolutionary interactive Netflix original that scored super high among fans, while Sandra Bullock-led Bird Box broke Netflix records for most viewers.
So long as Netflix maintains competitive pricing and continues to pump out quality original content, this global growth narrative will remain on track. That will help keep shares on a long-term uptrend. In the near term, the stock could get a boost as rate hike fears back off amid a rapidly slowing global economy.
An under-the-radar tech stock that has solid fundamentals and zero exposure to the slowing Chinese economy is digital education giant Chegg (NASDAQ:CHGG).
Chegg is a digital education company that builds connected learning tools for high school and college students across America. From this perspective, the company has zero exposure to China or any other emerging market. The growth fundamentals are aligned with a secular rise in digital consumption. And, the company’s operations are somewhat recession resilient since education is spend is one thing that likely won’t fall during an economic slowdown.
As such, with Chegg stock, you have a robust growth narrative with defensive qualities. That makes this stock an attractive addition to any portfolio during times of market turbulence.
As of this writing, Luke Lango was long AAPL, FB, GOOG, TWTR, AMZN, JD, SHOP, NFLX, and CHGG.