Top Tech Picks

Summary:

• It might surprise investors that tech has been one of the best performing sectors this year.
• Julian Lin runs Best of Breed Growth Stocks and shares which tech names he likes best.
• High-quality tech stocks ideal in times of rising interest rates and recessions.

Listen to the podcast embedded above or on the go via Apple Podcasts or Spotify.

Julian Lin runs Best of Breed Growth Stocks and today discusses the tech sector being a top performer (1:40), properly valuing growth stocks (10:00), sector layoffs (14:40), and his top tech picks (25:10).

Rena Sherbill: Julian, welcome to Investing Experts. It’s great to have you on the show. Thanks for making the time.

Julian Lin: Thanks for having me, Rena.

RS: It’s great to have you. For those familiar with Julian, they may know that he runs Cannabis Growth Investor. And I’ve talked to Julian a lot about cannabis on the Cannabis Investing Podcast. It’s great to talk your other service, Best of Breed and talk tech today. So super happy to get into it. I love it if you shared with listeners where we’re at or how you see where we’re at in the marketplace and specifically, vis-à-vis the tech sector?

JL: Yes, it’s definitely been a very volatile 2023 and 2022 years. I think – of course, most recently, we saw the turmoil in the banking sector, especially with Silicon Valley Bank (OTC:SIVBQ) and you know how cryptocurrencies have been. Really ironically, causing volatility in investor confidence and bank stocks and the deposit bases. But I think, but after very brutal 2020, end of 2021 and 2022 years, the tech sector has been rallying quite a bit. It might surprise some investors that they’re actually one of the top performing sectors this year, whereas the S&P is, kind of just around, up around, mid-single digits. Tech is up 15%, 16% as a sector, and many stocks are even up maybe 50%, even 100% from their 52-week lows.

And part of that may be due to hopes that interest rates fall, and I think because of that notion, some people might be thinking this is just, I think, the term is bear market rally or, they’re just thinking that this is a bubble that has not yet fully popped. But I think that kind of take is missing – is really missing the underlying fundamental drivers of this rally.

RS: What would you say are the fundamental drivers?

JL: Before when the tech stocks crashed, a lot of that was due to valuation. A lot of these names, for example, you got Twilio (TWLO), one of the names most beaten down and still quite beaten down even after the rally. I think that stock is down still like 80% from the highest. At one point that was trading at like 30x, 35x sales in spite of 30% top line growth. It’s a very, very aggressive valuation multiples that these stocks are trading at the top. But it’s also easy to forget why tech stocks traded at a bubble to begin with, right?

They’re not all techs, most tech stocks, they’re not meme stocks, right? We’re not talking about like an AMC (AMC) or one of those stocks where you really wonder why it would have rallied so much, right? These are not stocks that were teetering on the edge of bankruptcy. Tech stocks have very important business model advantages. The most important being the high gross margin and the ability to drive operating leverage.

Just to explain that simply, imagine you have one product and you just need to share that product over the cloud with every new customer. So, you don’t really need to customize the product all too much, or at least it doesn’t cost that much to customize the product for every new customer you bring on Board. It makes it easy to – at some point, every new customer is just – it just goes all the way down to the bottom line. That’s a very unique phenomenon that doesn’t show up in, for example, the retail or insurance or any other sector.

Those other sectors might have some operating levers, but not nearly to the same extent as tech stocks could have. But the thing is that just two years ago, a lot of these tech stocks, they were kind of writing the confidence in that ability to drive operating leverage over the long-term, meaning that they didn’t really show profits at the time. They were just – all the investors, Wall Street, they kind of just took it for granted that, yes, all of these tech stocks will eventually be profitable and very profitable even if they’re not profitable right now. That was what we thought two years ago.

And right now, after this crash, after pessimism has kicked in, it seems like Wall Street is now of the view that many of these tech stocks will never be profitable in spite of the fact that the tech business model lends itself to operating leverage. So it’s just important to remember that tech stocks, it’s not that they deserve to be trading out of bubbles, but they do deserve to trade at a rich or a premium valuation to the broader market because of that ability to drive operating leverage.

So, where does this come? How does this apply when we’re thinking about the current market rally? It’s very important. So what we’ve seen over the past six months – the past two quarters is, many of these tech companies, some of the best – most – many tech companies in spite of this macro environment are delivering some very, very impressive improvements in margin. That is, we all know that the economy is a bit shaky after the interest rates have risen so much, right?

It’s – all companies across the market are all trying to reduce costs to deal with inflation, not to mention rising debt costs and that is having some impact on these tech companies’ abilities to drive top line growth. So a lot of them are projecting some near-term headwinds to their revenue growth rates. They might have been growing at 30%, 35%, before 2022. Now, they are may be guiding for 15% to 25%. It’s a big guide down. You would think that’s just super bearish, but remember a lot of these tech stocks already dropped 80%, right?

So that part is more or less priced in. But what seemed to have surprised Wall Street was that, in spite of that huge headwind to their revenue growth rate, in spite of this tough macro environment, so many tech companies are suddenly guiding for improvements in profit margins, like some companies are – they were previously non-GAAP, not profitable on a non-GAAP basis and suddenly, they’re saying, oh, they’re going to be profitable on a non-GAAP basis this year or some companies were only profitable on a non-GAAP basis. And now they’re like, “Oh, we’re going to be profitable on a GAAP basis, or you got some companies starting to give some long-term GAAP guidance.”

Just to give some examples, Salesforce (CRM), one of the more well-known tech names, they laid-off 10% of their workforce and increased their full-year profit margin guide and are guiding for 30% non-GAAP operating margins within two years, and then they announced a $20 billion stock repurchase program, right? So you’re seeing a lot of these companies starting to address the concerns, remember before the previous issue was like, tech stocks are amazing, they have this long-term potential, but the only concern is that they were not profitable right now.

So you got all these tech economy, suddenly they’re addressing that concern squarely head on, kind of showing that, yes, even in such a tough environment, we are going to drive big improvements in profitability and margin, and that’s incredible, right? That’s not – it’s not easy to just survive in this current environment, let alone start showing that kind of improvement. And I think Wall Street is beginning to understand and appreciate that notion.

RS: It’s interesting. As I mentioned at the top, you run two services, Best of Breed Growth Stocks and Cannabis Growth Investor, both speaking to growth sectors, at least partly growth sectors. And hearing you speak about what’s happening in the tech sector, which is, these promises of profitability changes in guidance. Also, we’re seeing a lot of layoffs and Wall Street dealing with, kind of recognizing the difference between what’s really happening in front of them and what the promise of what might happen.

And then, kind of coming to terms with how to analyze these stocks, I’d be interested to hear how you discuss the notion of growth stocks, growth investing. And what – how best to, kind of fundamentally analyze these stocks and how much to – how much the headwinds play a part in the fundamentals?

JL: Sure. I guess, an easy way to answer that might be just to give an example of maybe how to value such a growth stock, because I think they’re still, especially – perhaps especially after such two years of pain in the tech sector, you got a lot of investors losing hope or starting to think that tech stocks are uninvestable, and it’s still a bubble they got to crash. I think there is an important similarity between the cannabis sector and many tech stocks. And that a lot of these tech names still are unprofitable on that, especially on a GAAP basis, right? So that could create a challenge to, I don’t want to say they’re traditional, but we could say conventional fundamental analysis or you’re trying to value companies on the basis of earnings. But how do you do so when a company not only doesn’t have much earnings, but they might be unprofitable, right?

So, at this point, it’s very important to circle back to the long-term business model idea that these tech companies, they are trading one product – they have one dev team, trading one product that they could sell to every customer. So, over the long-term, the idea is that these tech companies, they should be able to achieve a margin profile quite similar to a name like Microsoft (MSFT). Of course, Microsoft might be a higher watermark, but Microsoft right now has around 40%, 46% GAAP net margin. It’s very, very high profit margins. And the idea is that, as these tech companies mature, they will be able to achieve, maybe 20% or 30% net margins over the long-term.

So – and the reason why it’s important to view value tech stocks this way is because if you instead value them on the current basis of current earnings, you start getting really wacky growth rates, right, for the earnings because a lot of these tech* companies might have, like, 1% net profit margins or even less, and you start looking at like, exponential net income growth for every single year for a decade.

It doesn’t really make sense to value a company on the basis of that kind of growth rate, where if you instead assign what you believe to their – believe to be their long-term margin profile and then use their long-term revenue growth rate, then you could assess, I guess, if you’re a growth investor, you’ll be very familiar with the idea of a PEG ratio. That’s like a price-to-earnings growth ratio.

Peter Lynch, who wrote One Up on Wall Street, he made this ratio of payments. He said, you should buy these stocks when their PEG ratio is under 1x. At this point, this strategy becomes so popular that, 1x is kind of too cheap. It’s like a net-net kind of cheapness. But the idea is, okay, if you could assign what you believe to be the company’s long-term margin profile and then compare that with the growth rate, you could be able to value these companies very similarly to how you would value any other company.

Obviously, there will be that assumption, that using the 1x long-term growth rate. So just as an example, if we have maybe an Okta (OKTA), right? Okta is trading at around 6x sales. And if we assume that Okta is going to have a long-term net margin in the 25% range over the long-term, because, say, that it’s trading at 24x long-term earnings power.

And then you could compare that 24x earnings ratio with they’re around 18% or 20% revenue growth rate. And you see that the PEG ratio is around 1.5 or less. So, then we could compare that PEG ratio with the broader market, where the broader market PEG ratio might be more around 2.5x to 3.5x. And there you could see why many tech investors will view to take the tech sector as being undervalued on a fundamental basis across the sector.

RS: Speaking to the undervalued part, can you also speak to what’s – we’re seeing a lot of headlines about layoffs and some of these companies, if not being decimated being broken down a bit, can you speak to how that plays into how investors should be looking at the sector?

JL: Yes. So I think the layoffs are very important. But I think before I say anything good about layoffs, I should start by saying that it’s never good from a society perspective to do layoffs. I feel for every employee that has been laid off. So I hope it’s clear that any commentary I make, I’m not really supporting people to lose their jobs. It’s just more as an investor how the impact to the stocks from the layoffs, okay. Very, very important. Because sometimes in Wall Street, you could hear, you could see these companies do these big layoffs and then the stock goes up. And then it’s kind of called – it’s kind of sad here* if you’re infected. But kind of from an investor perspective, I think Wall Street is still overlooking the big importance of these layoffs. Because these layoffs they have big impacts. And I think you could look back to what happened during the pandemic, right?

During the pandemic, there was a lot of pandemic lockdowns and across the nation, across the world. You can think of a company like Uber (UBER), even without pandemic, like, even without lockdowns, the social distancing restrictions and the lack of travel made Uber and their business model or Lyft even, right, where their ride-sharing business totally came to a standstill. It was very, very unprofitable.

Just to survive Uber and Lyft (LYFT), they had to do huge, huge layoffs to right-size their cost structure, so they didn’t burn too much cash while they’re waiting for the world to recover. But what happened, just six, eight months later after they did these layoffs, what we saw was that, revenue – their business came back, started to recover, but they didn’t just rehire all those people they laid off. Their cost structure remained lean following that difficult period, and this is very important.

So we just talked about how a lot of these tech companies, they’re in spite of this tough macro environment, right, right now we’re seeing because of the tough economy, the revenue growth rates they’re decelerating 1,000 basis points or even more. But at the same time, their stock prices are performing strongly, at least over the last 3 months to 6 months, mainly because they have been able to couple – offset, rather offset that revenue, new deceleration in the growth rates with margin expansion. They’ve been doing a lot of layoffs just to give, not to pick on one company, but to give one example, Meta Platforms.

They did two rounds of layoffs. The second round of layoffs was up 10,000 people. The first round of layoff was up* 13,000 people, employees. And just last November, they had around 82,000 employees. So, if you just do a quick estimate, that’s around 27% of their workforce. And a lot of these are very high salary developers, okay? So around 27% of the workforce has been laid-off over the past five months, okay? And you could expect that once this economy improved, let’s say, one-year later, who knows? It’s not like the comp, all of these tech companies are just going to rehire all of those laid* off employees.

So, look, it’s very interesting. Just one or two years ago, these tech companies – well, I mean, Meta (NASDAQ:META) always seem profitable, but a lot of tech companies were just not profitable. You would have never – you’re not worried about profit or at least a lot of investors thought that they were like that. They had a substantial doubt that these tech companies were not just growing revenues without any profits.

There was that that fear or that reservation about tech stocks. But now what we’re seeing is because – especially because of layoffs, and I should mention that the – if it isn’t clear to listener, these layoffs, it’s, I mean, again, it’s very terrible that these layoffs are happening, but these tech companies, they’re able to take advantage of the current macro environment to do the layoffs.

And that’s also perhaps one reason why you see this huge strength in tech – in the tech sector even among companies that haven’t done that much layoffs yet. Because, I mean, if you kind of think about it, if you were to do these layoffs in a normal environment, you might get a lot of negative trust, right? Might get some politicians going, why are you cutting jobs? But if you’re to do big layoffs right now, I mean, no one’s going to come at you and be like, oh, why did you get rid of so many jobs?

Like, I don’t see anyone going to Meta Platforms and asking them why they laid off 28% of their workforce. That’s a huge amount, but no one cares because it’s a kind of a recessionary environment, right? So it’s – I mean, it’s weird to say, but this is very bullish from an investor point of view, because they’re able to – a lot of these tech companies, which had been previously investing very heavily in growth or in other words spending a lot on expenses, they could take this current opportunity to accelerate any cost rationalization.

It’s very similar to what happened during the pandemic where you saw a pull forward in growth like, e-commerce, right? You saw, like, many years of digital transformation happened within one year during that pandemic just because of necessity. We’re going to see something – first, we are seeing something similar right now, where we’re seeing many years of cost rationalization pulled forward in the tech sector because they could. Because they could just simply lay them all off, whereas maybe they would have not done that if there hadn’t been this kind of an environment.

Maybe they might have just slowed down hiring over the course of the next five to 10 years and had margins expand 100 basis points per year, but instead, you’re going to see some very, very huge implications to margin. And this is important because imagine what happens when the economy improves? So the cost structure will stay lower than before, but the revenues will go – the revenue growth might accelerate. And these companies, the management teams, they’re also going to have this more cost-focused mindset.

So they’re not going to hire as aggressively as before. So you add the two together, right, you have a lower cost basis. You have our cost expense structure. They’re also not going to hire as aggressively as before. So as revenue growth accelerates, you’re going to see greater operating leverage. In other words, you’re going to see more margin expansion, significant margin expansion even beyond what we’re going to see right now from the layoffs.

RS: It’s an interesting point and I agree, it needs a preface that it’s a bit deflating to think that way. But to hear your point about companies taking advantage of the macro environment to push these cost saving measures forward, would you say that that’s a reflection of, I mean, I know that you’ve been speaking about it this whole conversation, but would you point to the fact that it’s a change in dynamic, meaning there were these promises of growth or was it more like bubble like growth that they were growing in a way that they were always going to have to snap back to reality, and this is just a good opportunity to do that?

JL: So I think there was definitely, especially after the pandemic, a lot of these management teams were taken by surprise by how much of the growth was an acceleration or pull forward? How much of it basically was not sustainable? I think a lot, especially in e-commerce, a lot of these names, they didn’t expect the growth to decelerate this much and this quickly. But I do think that a lot of it’s just sentiments, okay? So, I think prior to 2022, 2023, investors in large thought a lot of these tech companies just didn’t even know what a profit was or didn’t care.

They had this view that, oh, these management teams they – my favorite one is that, if gross profits or how do they put this? If a company was getting more and more unprofitable, the luck – the faster they grew, a lot of investors who are just concluding that it was a bad business model, which on the surface, it might seem like that, right? It might seem like, “Oh, why are you losing more money than more revenue you make.” But at the same time, it overlooks the fact that a lot of companies, they could simply be investing more heavily in R&D with the idea that over time they would cut back or pull back from that growth, so that they can show more operating leverage.

It’s like – it’s kind of like losing money by choice, whereas if Wall Street was thinking that they were just losing money by structurally flawed business model. But I think that what we’re seeing right now is that the sentiment will change because they start to realize that these same management teams, right, you’re not – they didn’t need an activist investor even though there has been activists investing at, like, Salesforce. But across the sector, you didn’t really see activist investors go at these companies to force these layoffs and force these profit – these margin expansion plans.

They just happened. These are the same management teams as just two years ago, but suddenly, they are actually really focused on margins and really able to drive margin and expansion, to drive profitability. So you’re starting to see sentiment shift and there’s realization, like, oh, these – not only can these management team strive aggressive top line growth, but they actually do care about profit margins. Yes.

RS: So, let me ask you in terms of the top undervalued picks that you have in the sector, what would you – what names would you put there? And if you could get, kind of break down their financials a little bit, get into the fundamentals of it a little bit?

JL: Yes. So there’s two names I could discuss. One would be Meta Platforms (META) and the other would be SentinelOne (NYSE:S). The first one, Meta. I just pointed out that they had laid off around 27% of their workforce since last November when they first started doing the layoffs. The Meta Platforms stock is already up over a 100% from the lows. So, some might be thinking, oh, it’s expensive at this point, but I’m not really of that view. So their stock is currently trading at around 24x earnings, but it’s important to note that earnings have gone down over the past two years, mainly because CEO Zuckerberg has been really pushing hard to invest in the metaverse.

So, like, if you were to like assign a zero value to the Reality Labs, the metaverse business, the core social media, Instagram, Facebook platforms, it’s trading at around 18x earnings or less. Not to mention this company has around 10% of its market cap represented in net cash or – and maybe it is around 7% at this point. And the key point is that, yes, it is possible that the stock has been rallying in part due to hopes that TikTok will have a ban in the USA.

I mean, I am a bull on Meta Platforms, but… I don’t really think that TikTok (BDNCE) will be banned. As an investor you know, I wouldn’t mind it, but I’m not as confident maybe as some other pundits on Wall Street on that front. But I think that the stock is undervalued even if TikTok is not banned. I think that Meta Platforms, what we saw in the past couple of quarters is that they have been able to stabilize their user base and their growth rates in spite of the TikTok competition, inside of the macro environment. This is a company that’s been heavily, heavily investing in growth.

It appears that they have been able to overcome their competitive issues with TikTok through innovation. If you’ve been using Instagram, I guess, one of those innovations would be their ability to recommend new content on your content feed instead of only getting content from people you follow. That’s definitely been something I’ve witnessed myself. And the idea with this is, this kind of, if you’re talking about simple narratives, it’s the – the idea is that they laid off 27% of their workforce.

You got – finally, we have a management team that’s embracing shareholder value, and they’re showing despite investing more than 100% of free cash flow towards share repurchases, right? Just maybe five years ago, Meta Platforms are an Alphabet. They weren’t really repurchasing stock so meaningfully, but that’s all changed now. So these management teams are very focused on profits, and they’ve already laid off 28% of their workforce. So what happens once the economy recovers, right? You start to get an improvement in revenue growth.

You start – all the gains in the profits are still there. And the stocks right now are trading at 24x earnings, and that’s inclusive of the losses in the metaverse. And then not to mention, what happens in the metaverse business either, starts reducing profits or shut down. So this is a very, very highly profitable and arguably safe based on how much profit and cash is on the balance sheet pick. Yeah, it trades at 24x earnings.

I would say that if you wanted to make a trade more in line on the growth adjusted basis with some other names, like a Walmart (WMT) or Target (TGT), like just a typical S&P 500 names, it deserves at least a 30x, 33x earnings multiple, right? So, in the meantime, you also get a lot of leverage to an improving macro backdrop, as that online advertising improves.

So yeah, Meta Platforms is one of my top picks in spite of the huge bounce from the bottoms. It’s not every day that you get to buy a company, a stock from a company with secular growth, but 30%, 35% net profit margins, net cash on the balance sheet, and you get to buy it for a sub, a below market multiple. That would be why I like Meta Platforms.

RS: Can I ask you, while we’re still on Meta, two questions, a, why do you think that TikTok won’t be banned in the U.S.? And b, do you think the focus on the metaverse is wrong to focus on and they will pivot?

JL: Great. Yeah. So in regards to TikTok, hopefully, it didn’t get too political. But, like, I mean, so I don’t – again, I’m long Meta, and I should preface, I would definitely not mind if TikTok was banned. I don’t personally use TikTok, so I’m not going to shed any tears on this point. And as a father, I don’t know if my kid would be playing TikTok in the future. Who knows? But at the same time, I have to acknowledge that I mean, it would be a little bit weird, as an American, if I see this happen.

It’s – there’s a lot of similarities between the, I think, they call it, the Red Scare, or there is a communist scare in 1970s, where anything related to communism was like, really – was really villainized, right? And it’s kind of similar now just because I mean, again, I wouldn’t mind, if it was banned. But if you were to look at the testimony, when the TikTok went to the Secret Congress, a lot of the questions they were asking them actually weren’t really issues with TikTok.

You could argue that there are also issues with, like, Facebook or any other American company, but it just – the unfortunate thing is that TikTok is associated with China. So they kind of get less – it’s less forgiving of this. But look, so I can see it’s possible that TikTok gets banned just because from a political’s perspective, I’m not sure that people care that much about TikTok to get that mad, if they were to abandon them. It’s not like, they’re the only game in town that worst case, the kids could go to Instagram.

They might complain, but it’s not like you’re removing water or something. It’s not terrible. But at the same time, it just doesn’t really fit in with American values of freedom of speech. So I guess when I try to touch my base case investment scenarios, I don’t, I want to go more pessimistic than optimistic. So, I don’t think they need to talk to slam dunk, and that’s why I just don’t model that as my base case here.

RS: Fair enough. And the focus on the metaverse for Meta, what are your thoughts on that?

JL: Yes. So I have tried the metaverse headset before. I think it’s the Oculus. I think it was Oculus 2 at the time. I mean, it was interesting. I think I’m probably the wrong audience because I don’t play video games myself, but I could, I mean, I don’t know. Mark Zuckerberg is a very, very smart guy, obviously, right? And he definitely shouldn’t be underestimated. I think at this point, there’s very little confidence from anyone besides him, maybe in the metaverse. I think there’s a great risk that it ends up being too early how remarks the great investor has said that if being early is just as bad as being wrong, right?

RS: Right.

JL: I think there’s such a chance that the metaverse might be – there is definitely a risk that the metaverse is going to be, sort of similar to how the dotcom bubble was? And that, maybe, I mean, there was fraud in the dotcom bubble, but a lot of, like, really actually good names like Amazon (AMZN) and the dotcom bubble, they were real businesses. They were going to do well if maybe it was 20 years later. But they were just really early. So, it’s maybe they weren’t doing well back then.

Metaverse might be very similar, where maybe the world is not ready for that. And it might – we might even wait 15 year, 20 years before people are more comfortable wearing some random headsets and feeling like they’re close to other people. I don’t – that’s possible. But I think, it’s kind of – the interesting thing is that in the case of Meta, they were making so much money that even inclusive of all of the 13 billion, I think, they’re spending annually on the metaverse, they are still trading at 24x earnings.

And I’m sure many readers have – many listeners have read the book Zero to One by Peter Thiel, a great tech investor. He mentions how a very clear indication of a monopoly is, and in this case, it’s good to be a monopoly because you make a lot of profits is that you start to invest in these ultra long-term ideas, right? So when you see Meta Platforms or Google, they’re investing in these self-autonomous driving or in this case of the metaverse. It’s okay.

I mean, there might be ultra long-term views, but also indicates just how monopolistic and how impressive the profits are. So, I mean, I think, I don’t know if they’ll pivot, it’s really all based on CEO Zuckerberg and he has full control. I wouldn’t say that they’re going to stop it anytime soon. But I would imagine that there is a time limit, like, sure, he’s kind of a chosen one and he has control. But I would imagine within five years at most, the Board of Directors, the management team, investors will lose some patience. You can’t spend $50 billion without a return. At some point, there will be a resolution there.

RS: Yeah. It needs to – even if you change the company name to suit your focus, you still need to pay the piper at some point. You want to talk about the other undervalued names you see in the stock list?

JL: Yeah. The other name actually takes a different view. It’s SentinelOne. The stock ticker is just S. So SentinelOne is a cybersecurity stock. It focuses on the endpoint protection. What that means is, an endpoint is just like a device, like a laptop, or something, or a phone. It just means that SentinelOne helps protect that endpoint from hackers. And cybersecurity is one of the more promising subsectors in the tech sector, just because cybersecurity threats, there’s some emotional value in it.

There’s always this idea that you will never be safe, and there’s never peace in the world. I’m not trying to get political, but cybersecurity is just very important. You always want to be investing with the best. And SentinelOne has been doing well as one of the innovators, right? This is an area where, I mean, if any of you’ve been using antiviruses, hopefully, you have – you’re very familiar with names like McAfee or Symantec, it’s a Norton AntiVirus. Those are names that have been around for, what, 20 years, 30 years, yeah, but they’re not very good.

They’re not very – you can imagine in the tech world, there’s those products that are constantly being improved and heavily invested in, whereas there’s also the products that they’re just, kind of being milked to make maximized profits. So, those old softwares, they’re kind of in a laddered group, whereas SentinelOne and CrowdStrike (CRWD). CrowdStrike is the biggest new innovator also. They’re taking market share very rapidly from the old names. Just because they’re offering us superior products, and nowadays, people are going to be willing to pay more for better cybersecurity protection.

And SentinelOne, it differentiates itself – probably it’s trying to differentiate itself to other cybersecurity products due to its use of artificial intelligence and – okay, they didn’t – they weren’t, like, saying this after ChatGPT and all of this AI hype. The idea is that they use artificial intelligence, so that they could automatically resolve any threats, whereas other products, you might have to have a human person analyze the so-called threat and then resolve it themselves. So that’s the unique feature at SentinelOne.

So – but what I mentioned at SentinelOne is different from what we have been discussing earlier, and that’s because it’s not profitable, not even on a non-GAAP basis. Not only that, they’re not doing any layoffs, right? So they’ve really taken a different stance then in the other tech companies. They’re not taking advantage of the current environment to do any layoffs in spite of the fact that they are not profitable even on a non-GAAP basis. But this is a name which I think is arguably, you could say it’s more contrary investing in the tech sector, right?

So, whereas in tech right now, the current investment theme is to be buying these profitable names that are showing margin expansion. The contrarian view would be like, oh, but what about the names that aren’t doing that, but that are still losing a lot of money? Those names have become very hated. And SentinelOne is – it might be one of the more undervalued names in that respect.

So SentinelOne is – was recently trading hands at around 8x analyzed revenues, but they’re guiding for 50% revenue growth this year, and that’s supposed to be a low mark because of the poor macro environment. I know this is one of the – it’s a very, very fast growing name, kind of 8x sales at 50% growth just to give an indication, CrowdStrike. CrowdStrike is growing at around 30%, 35%, but they trade at more like 13x to 12x sales, right?

So SentinelOne is trading at a lower multiple in spite of significant faster growth than many other tech names largely because it’s not profitable on a non-GAAP basis. The company has been delivering 25% – around 25% of margin expansion for many years, and they’re, kind of guiding to be able to do that. So, they’re hoping that, within two years or so, they will be generating cash flow and profitable.

So, they’re still, like, focused on profits, but mainly through operating leverage, not through the more direct layoffs and so forth. So SentinelOne is more of a valuation pick. They have this blend of more reasonable valuation, but still are generating really, really impressive growth rates.

RS: And any other stocks you like or any stocks that you would point to that you feel like investors should not be looking at or shouldn’t be bullish on?

JL: Yeah. I think while the tech sector I view is, kind of has been quite undervalued overall. I think the investors still should be very selective within the sector. There’s still many stocks that do appear overvalued. Maybe their evaluations are not reflecting the risk profile that they are having or there’s also a lot of companies that maybe unlike Meta Platforms or Alphabet (GOOG) (GOOGL) because they’re profitable, they might have very rich valuations.

I would say valuation mattered two years ago before the crash. Valuations matter now. And that’s because, if stock is down 80% from the high, it doesn’t mean it’s cheap at this point because maybe they were – a lot of these tech names were trading at bubble valuations before, and they might still be trading at a rich valuations now.

So, this is an environment in which it’s a buyer’s market, let’s put it that way. And because it’s a buyer’s market, you don’t want to be – you want to be very careful with what you buy. You don’t want to be buying a stock that isn’t actually that cheap. Because if you were to do that, then once the whole sector recovers, you might underperform just because you didn’t buy a stock that actually is cheap.

JL: Yeah. I think just on a closing thought, I think that while tech has definitely borne a lot of pain over the past two years. And definitely at the – in the beginning, investors are selling off-tech stocks because of rising interest rates or possibilities of a recession. I think we’re going to see very quickly that that narrative changes that – as what we’re seeing right now is that a lot of these tech names, in spite of a recession, in spite of rising interest rates, they’re still showing growth rates that are well above the market average.

So, in other words, whereas maybe one or two years ago, tech stocks were of the view that, oh, they should be sold during periods of rising interest rates or they should be sold during periods of recession. It’s actually going to be the opposite in my view. People are going to realize the high-quality tech stocks. They’re ideal in times of rising interest rates and ideal one in times of a recession just because of their ability to drive strong growth and now that they’re trying to show profits and drive margin expansion amidst such a difficult period.

And it’s important as investors to be able to not get locked down to one view, kind of because maybe that view was incorrect, right? We got to be able to constantly shape our views to – and adjust. And I think that’s going to be the biggest adjustment over the next several quarters, especially in the tech sector.

RS: Yeah, it’s a good place to end it. The only other thing that I wanted to ask you, given your proximity to Silicon Valley and your focus on the tech sector. Anything you have to say and it could be that you don’t have anything to say, there have been many words spent on this topic. But anything that you have to say about Silicon Valley Bank imploding and every – the fallout and how that may affect the tech sector in general?

JL: So I think that the fall out will be mostly with the private tech companies on some of the smaller start-ups. I think that it might – if there’s more volatility, more drama in the future, it may still impact the stock prices anyway just because that’s the nature of it. But from a fundamental financial perspective, high tech*, I think the larger tech companies will be more insulated from bank fall outs. A lot of these tech companies, they’re not banking with – they weren’t banking with Silicon Valley Bank or anything like this.

There just wasn’t, it doesn’t make sense to have that many billions of dollars placed there. But whereas if you’re like a start-up tech company, that you’re burning money and you didn’t have that much cash, it made sense to bank there because they might have given you certain perks.

So, I would say that definitely watch out for volatility and might offer some buying opportunities or maybe even selling opportunities. If you’re still holding on to some loser, you didn’t want to acknowledge, but I’m not worried on a fundamental basis about this banking drama affecting at least the tech – top tech sector.

RS: All right. Very good. Well, Julian, thanks for coming on. Always enjoy talking to you, one of Seeking Alpha’s great analysts. Check out Best of Breed Growth Stocks. Also, don’t forget Cannabis Growth Investor, which if you’re still interested in the sector, Julian and I have some things to say, and Julian has very strong analysis coming out of that sector as well as the tech sector. So, Julian, thanks for joining us today. Really appreciate it.

JL: Thanks for having me on, Rena.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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