The highflying technology sector suffered the sharpest sell-off in more than five months over the past couple of days. This is especially true as the S&P 500 Information Technology Sector Index tumbled nearly 8%. The five giants — Facebook (FB - Free Report) , Amazon (AMZN - Free Report) , Apple (AAPL - Free Report) , Microsoft (MSFT - Free Report) and Alphabet (GOOGL - Free Report) — have largely led the plunge.
The weakness came on the back of overvaluation concerns, which prompted investors’ to cash in on big gains clocked in August. No doubt, the tech stocks have lofty valuations after a super powerful rally over the past five months (read: ETF Winners & Losers From Wall Street's Worst Day Since June).
Investors should note that the five stocks, accounted for nearly a quarter of the S&P 500’s market capitalization, have been the winners of the stay-at-home trend during the coronavirus crisis and led the broad market rally since hitting lows in March. With the pandemic continuing to rage and a vaccine perhaps months away, the beaten-down technology stocks seem attractive.
The global digital shift that has accelerated e-commerce for everything ranging from remote working to entertainment, and shopping will drive the sector higher. The rapid adoption of cloud computing, big data, Internet of Things, wearables, VR headsets, drones, virtual reality, artificial intelligence, machine learning, digital communication and 5G technology will provide added advantage. Further, the Fed has been easing aggressively which would continue to provide ample liquidity in the market.
One analyst Wedbush believes the tech sell-off is a buying opportunity for stocks, especially cloud, cyber security, and tech stalwart FAANG names, despite the wide chatter of a tech bubble burst and stretched valuations. It expects tech stocks to go higher by an incremental 20-25% given its strong resilience in the face of the COVID-19 pandemic (read: Leveraged ETFs That Are Riding High on a Solid Market Rally).
Moreover, the above-mentioned tech giants have solid fundamentals as we entered into a historically weak month.
The social media giant has an earnings estimated growth rate of 25.3% for this year. Revenues are also expected to grow 13.5%. Facebook has a Zacks Rank # 2 (Buy) and a P/E ratio of 35.10 versus the industry average of 37.74.
The e-commerce behemoth has an estimated growth rate of 39.1% for earnings and 31.3% for revenue for this year, much higher than that of industry’s growth of 11.7% and 0%, respectively. Though the stock has inflated P/E ratio of 102.97 versus the industry’s 52.86, AMZN has a solid Growth Score of A. It carries a Zacks Rank #3 (Hold).
The technology giant is expected to see above-industry earnings growth of 23.79% for the fiscal year (ending Sep 2021) and revenue growth of 14.95%. However, its P/E ratio of 37.44 is higher than that of industry’s 8.97. Apple has a Zacks Rank # 2 (read: 5 Top-Ranked ETFs to Taste Apple's $2 Trillion Market Cap).
The world's largest software maker has an estimated growth rate of 11.1% for earnings and 8.57% for revenues for the fiscal year (ending June 2021), much higher than that of industry’s growth of 5.95% and 2.10%, respectively. The stock has a Zacks Rank #3 and Growth Score of A. Its P/E ratio of 33.49 is below the industry average of 34.62.
Alphabet is expected to record earnings decline of 9% for this year while revenues are expected to grow 7.5% from the year-ago quarter. The Internet behemoth has a Zacks Rank #3 and Growth Score of B. It has a cheap valuation with P/E ratio of 35.34 compared to 37.74% for the industry.
ETFs to Tap
Given this, investors may want to tap the beaten down prices with the help of these ETFs. Below we have highlighted five ETFs having the largest exposure to the five tech names.
MicroSectors FANG+ ETN (FNGS - Free Report) : This ETN accounts for 10% share in each of the five tech giants (read: August Clocks Monster Gains: 5 ETF Areas Up At Least 20%).
iShares North American Tech ETF (IGM - Free Report) : This product accounts for a combined 38.1% in the five tech giants and has a Zacks ETF Rank #2 with a Medium risk outlook.
Invesco QQQ (QQQ - Free Report) : This fund makes up for 43.8% share in the in-focus firms and has a Zacks ETF Rank #1 with a Medium risk outlook (read: Nasdaq Tops 12,000: 5 Hot Stocks in the ETF).
iShares Evolved U.S. Technology ETF (IETC - Free Report) : This fund accounts for 45.1% share in big tech stocks.
iShares U.S. Tech Breakthrough Multisector ETF (TECB - Free Report) : This product accounts for a combined 22.1% in the five tech giants.
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