Why I am still taking these tech stocks to task

This is The Takeaway from today’s Morning Brief, which you can sign up to receive in your inbox every morning along with:

If you are looking to be consoled after 25% in value was sliced off your software stock holdings this week, then click out of this and go about your day.

Because I’m not here to offer up sloppy kisses and warm hugs. I’m in a mood to dish out some pain on two fronts. One is to you — the investors I love so much — as these painful losses could have been avoided. All you had to do was what I have suggested time and time again: take frequent pulse checks in the companies you own.

So many software stocks were priced for perfection (and still are) coming into the year, and the backdrop was far from perfect. AI updates out of Anthropic (ANTH.PVT) and Google (GOOG, GOOGL) are calling into question the long-term value of software companies.

Meanwhile, these stocks were bid up to aggressive valuations in part because of hopes of additional interest rate cuts. Well, Fed Chair Jerome Powell told you last week those weren’t coming anytime soon. And the Kevin Warsh announcement as Fed chair nominee hasn’t helped matters.

The entire software investment thesis has been blown up.

I also want to hand out pain to a few tech companies that I lightly touched on during Opening Bid late in the week.

First, Qualcomm (QCOM).

Qualcomm’s guidance stunk, and the sell-off on Thursday was deserved. The company called out weakness in the smartphone market, largely due to the global memory chip shortage. Execs said this dynamic could persist into 2027.

An outlook like this should have been teed up by management three months ago. Come on, guys, do better!

Expect Qualcomm shares to stay in the penalty box.

“Smartphone headwinds an ongoing concern; AI chip potential still unclear,” HSBC analyst Frank Lee said.

The next tech giant in line is chip player Arm Holdings (ARM).

Arm also served up some less-than-savory guidance, blaming memory chip shortages. Keep in mind that Arm designs the architecture that forms ⁠the basis of a large chunk of the ‌world’s smartphone chips. That leaves it with the prospect of subdued royalty sales amid soft mobile processor sales.

Similar to what I just said about Qualcomm, Arm execs should’ve done a better job guiding investors to these challenges.

Instead, investors in both companies are left holding the bag. Arm shares are also likely to stay in the penalty box.

And I know you want me to lay into Alphabet (GOOG, GOOGL) for shocking the hell out of everyone by calling out up to $185 billion in capital expenditures this year. The Street estimate was around $120 billion.

But I’m not going to lay into Alphabet for one simple reason: The fundamentals of its business are so strong that you can justify this level of spending. Check out these two random numbers I yanked from the earnings call transcript.

• In October, YouTube viewers watched more than 700 million hours of podcasts on living room devices, up 75% from a year ago.

• The company has 8 million paid seats of Gemini Enterprise, which it launched just four months ago. And the Gemini app now has more than 750 million monthly active users. These are huge numbers that should have OpenAI (OPAI.PVT) quaking in its boots.

“The quarter strengthen thesis that: 1) Google search activity will accelerate from new AI use cases (not losing queries to OpenAI), 2) AI can structurally drive higher Search monetization, 3) Gemini large language models and TPUs are cloud competitive advantages, and 4) Cloud capex is high return on investment, and more capacity will accelerate cloud growth,” BofA analyst Justin Post said.

Is this coming week one where you bottom-hunt in software? I will leave you with this thought: Have you ever tried catching a falling knife with bare hands? My point exactly.

Stock spotlight: e.l.f. Beauty

I’ve had the good fortune of being in finance in various capacities for 22 years. And a lot of you remember when I was an analyst writing research reports and making stock calls. I appreciate you riding with me all these years. You have told me lately that you miss me picking stocks.

I feel you, but this is a different point in my life and career. However, I will try to do a better job at whipping up short analyses when possible on stocks that leave an impression on me one way or another.

To that end…

Hailey Bieber’s power to drive the cosmetics industry seemingly has no bounds.

That’s one of my thoughts as I reran the numbers this week on e.l.f. Beauty’s (ELF) latest quarter, which was powered by the company spending $1 billion to buy Bieber’s cosmetics brand, Rhode, last August. E.l.f. hiked its top- and bottom-line outlooks for the year because of momentum with Rhode, but also because of new shelf space wins at Walmart (WMT) and Dollar General (DG).

Yet the stock sold off by 6% on Thursday. It’s off by 63% from the February 2024 highs.

I don’t love the cosmetics industry. It’s volatile, competitive, and very hit-driven. But I will say this: The Street could be missing things a little on e.l.f.

I liked what CEO Tarang Amin told me about demand trends for Rhode on Opening Bid and how the core business of lower-priced cosmetics is performing at major retailers. I also like that the company has gained a lot of new shelf space at those aforementioned two retailers, as well as Target (TGT).

Take that for what it is.

Brian Sozzi is Yahoo Finance’s Executive Editor and a member of Yahoo Finance’s editorial leadership team. Follow Sozzi on X @BrianSozzi, Instagram, and LinkedIn. Tips on stories? Email brian.sozzi@yahoofinance.com.

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