Magnificent Seven tech stocks have stolen the show this earnings season, but various other tech stocks are making waves. On the latest installment of Good Buy or Goodbye, Yahoo Finance’s Julie Hyman is joined by Barron's Markets Reporter Jacob Sonenshine to weigh in on several stocks that have caught his attention.
Chipmaker ON Semiconductor (ON) is Sonenshine's Good Buy for three reasons: cyclical recovery in the auto industry, EV chip cycles, and gross margin expansion. Sonenshine believes that the company has “a lot of cash" for stock buybacks, but notes risks present in recoveries to auto production and chip demands.
Financial payment platform PayPal (PYPL) is Sonenshine's Goodbye over its market share losses, declining profits, and lack of innovation seen in its products.
Catch more of Good Buy or Goodbye here, or watch this full episode of Yahoo Finance Live.
Editor's note: This article was written by Eyek Ntekim.
Video Transcript
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JULIE HYMAN: It's a big, noisy universe of stocks out there. Welcome to "Good Buy or Goodbye." Our goal is to help cut through that noise to navigate the best moves for your portfolio. And today we're taking a look at some tech growth stocks which may have fallen off your radar, as the Magnificent Seven has dominated the space and grabbed the headlines.
We're looking at two of the less loved names in the market and highlighting which one could benefit from some key growth trends and one that might not. I'm here with Barron's reporter Jacob Sonenshine. Jacob, thanks for being here.
JACOB SONENSHINE: Thanks for having me.
JULIE HYMAN: Good to see you. So, let's get right to it. Your buy stock in this space is one that had some headlines earlier in the week, and that is ON Semiconductor. And the stock's been sort of volatile over the past year or so.
Down, you could say, over the past six months. So let's get to your case here. They make chips for autos, among other things. And we're looking at a market that's maybe has bottomed for the auto market.
JACOB SONENSHINE: Yeah, we need a cyclical recovery in automobiles. That's been hurting a lot of chip makers. It's been hurting Tesla, as we know. I can't sit here and nobody can sit here and exactly call the bottom in the auto sector, but we're getting really, really bad volumes. Production for autos is going to be flat this year, in 2024.
Once we can get that cyclical recovery in autos, and I do think, by the way, interest rates are stabilizing. So that's great news for a sector like autos. Once that stabilizes, you're going to see revenue growth for ON Semiconductor, because I think our next point, right, is on electric vehicles.
JULIE HYMAN: Yeah, let's talk about electric vehicles, right? Because they're, say, if I have a gas-powered or even a hybrid vehicle and I'm switching to an EV, as many people still are, even though there's some concern about waning demand, that needs a different kind of chip.
JACOB SONENSHINE: Yeah. And I don't know that much about the mechanics of automobiles or about the technology of chips, but I do know that the content per chip, and just the amount of chip and power that needs to be in an EV, is higher than that of traditional vehicles. So as ON moves into EVs, it's getting that tailwind, and that is incremental revenue for ON Semiconductor. And so you could get mid-single digits total revenue growth for the company. They've got some mature market smartphones, but EVs will see mid-single digits revenue growth.
JULIE HYMAN: Gotcha. And then finally here, an expansion in gross margin. And we should mention, by the way, as we talk about ON Semi, when I mentioned it had headlines earlier in the week, it was out with its earnings. And there were some concerns around its numbers, right? But you're looking at perhaps margins expanding here.
JACOB SONENSHINE: The earnings in Q3 and Q4 were not great and the guidance has not been really good at all. The market has expected that. We came into Q4, which we got a few days ago, with ON Semi trading about 15 times analysts consensus earnings estimates. The guidance in Q4 wasn't great.
The stock still went up 5% because it was trading at 14 times. This is a company with gross margin expansion that could do double-digit EPS growth. It's got a lot of cash. It can do buybacks.
So came into Q4 14 times, now it's trading about 18 times P/E. When you look at the earnings that are going to be a little bit depressed this year, I still don't mind that. This stock could trade in the 20s and the EPS growth is going to be there over the long term.
JULIE HYMAN: Gotcha. OK. Risk to the upside here could be if, indeed, autos don't, you know, bottom out and then recover maybe on the same timeline that you're potentially looking for.
JACOB SONENSHINE: Any bear ON Semi or any bear on this little group of stocks-- ON Semi, Texas Instruments, NXPI-- that are exposed to autos is going to say, we're just not at the bottom yet. But guess what? If you're picking stocks, if you're watching the show here and you want an idea, you got to go in and get something that's cheap and that has growth potential. So you have to take a chance on this.
JULIE HYMAN: Gotcha. And we should mention you don't own ON Semi, you don't own any of the stocks we're talking about. But let's get to the one that you don't like. And this one is also, by the way, a newsy one, because it's going to be out with its earnings after the close of trading.
We're talking about PayPal. A lot has gone on at PayPal over the last year, including, of course, a new CEO for the company, some new products, et cetera. But at the same time, you say it's been losing market share.
JACOB SONENSHINE: It's been losing market share. So the digital payments business, as we know, has been growing close to double digits. It's decelerating but it's still growing. It's still displacing traditional ways of doing things.
PayPal has been growing sales less than the industry-- less than the business. It's been losing market share. You can clearly see in Apple's services business, Apple Pay has been doing really well. My Apple digital wallet is really useful for me, especially at things like the airport.
Google Pay, other things has lost market share. One of the big issues-- we're going to get there in a second, but I think we start with loss of market share. That's been really tough for PayPal.
JULIE HYMAN: OK. So let's then get to slow growth. And this should be profit margin declines. Forgive us for the dropped word there. But just that it's not growing at the same rate as some of its peers as well.
JACOB SONENSHINE: And the big issue is that the loss of market share in specifically branded checkout is really bad because newer segments that are less profitable like Venmo and other smaller segments that PayPal has kind of stopped up, those are faster growing than branded checkout, and they're also less profitable at lower margin. So now you have this mix of lower margin coming in.
And so, if you actually look at analyst estimates for gross margin in the next few years, it's going down from about 50% like a year or two ago to maybe 39% in the next few years. They might eke out stable to slightly higher EPS growth over the next few years, but the gross margin issue is going to keep the multiple in the stock back.
JULIE HYMAN: OK. And then the last thing also that we're looking at is they have come out with some new product announcements. In fact, notably, recently, they had teased a big new product announcement, then they came out with a bunch of stuff and the market said, that's it?
JACOB SONENSHINE: They made some product tweaks. They made some minor tweaks. And forgive me, I don't remember exactly what they were, but the stock did--
JULIE HYMAN: Which I guess says something.
JACOB SONENSHINE: Exactly. And one of the things that I was looking for that I think a lot of analysts were looking for was a digital wallet like sort of what you can get on your iPhone, something that can significantly-- that can kind of thoroughly compete with the new entrants into the market.
They didn't announce that. The CEO was very kind of adamant in a recent interview on television talking about tweaks the company is going to make. But they haven't made the type of tweak that's going to make them competitive again.
JULIE HYMAN: OK. So, the risk here to your downside case is if they did, you know, come out with that, if he changes course and introduce that kind of new product.
JACOB SONENSHINE: And that would send the stocks soaring, at least. I was talking with my boss just a few days ago. It could cause a quick little pop in the stock because people would start to get more confident in market share, gross margins. The whole story flows into earnings and P/E multiple expansion from there. My concern is to assume that would be speculative because I have not seen evidence of that.
JULIE HYMAN: Right. Well, we'll get more information on all of this after the close today when we get the earnings. So let's sum up what you're telling people here. Basically, you're telling investors people should consider buying ON Semi. You believe it's an undervalued growth stock and that the auto market is recovering, paired with continued execution on long-term opportunities.
On the other side, you're saying you might want to avoid PayPal, warning us to not look for more product innovation necessarily, or at least not in the very short term. And it is also seeing some losing market share. Thank you so much, Jacob Sonenshine of Barron's. Really appreciate it.
