While some continue to vacillate on the correct strategy for 2023, others figure that this is enough of a dip to get back into growth (mainly tech) stocks that will be driving our future. That’s why the tech universe is seeing funds pouring in, with Netflix advancing 8.46%, NVIDIA 6.41%, Alphabet 5.34%, Baidu 5.91%, Qualcomm 4.52%, Snap 3.85%, Amazon 3.81% (included by virture of AWS), Micron 3.73%, Microsoft 3.57%, AMD 3.49%, Paypal 3.05%, Taiwan Semiconductor 2.98%, Intel 2.81%, Meta 2.37%, Apple 1.92%, etc.
One thing that’s playing into this renewed enthusiasm for tech is the fact that it has completed a year of difficult comps, so growth rates are bound to pick up. The tech sector had a couple of years of tremendous strength during the pandemic when both consumers and corporates were racing to equip themselves for remote operation. Therefore, many pulled forward their tech investment plans. 2022 was always expected to be slow in comparison to the prior year. Now that we are in 2023, growth should return. Or at least that is the expectation.
The second thing that makes tech attractive is the decision to trim the workforce. Through 2022, we were seeing massive layoffs at most technology companies. And unlike other sectors where labor is extremely tight, the technology sector had over-hired during the pandemic. Therefore, it was relatively easier to let some people go. As business picks up this year, they can hire back depending on their needs without the concern that talent will not be available. The government is also encouraging foreign tech workers, which will add to the pool of available talent.
The third reason that tech is attractive is related to the economy. In general, when companies exit a recession/soft patch, they try to invest more in tech so that they can get more out of their existing infrastructure. And any new infrastructure always involves a larger spend on technology to make it more efficient. Therefore, as interest rates stabilize (as market experts expect them to this year), companies will get back to investment, which will spur growth for tech companies.
A look at the Zacks Consensus Estimate for the sector is also indicative. The 2023 estimate has dropped 29.3% over the past year as analysts made adjustments for a softer operating climate, which is a positive because the bad news is priced in. However, what’s worth noting is that this estimate represents a 21.9% increase from 2022. Therefore, growth is clearly indicated, which is good reason to be optimistic on the sector.
Most of the big technology stocks currently carry a Zacks Rank #3 (Hold). Let’s take a look at some examples to see what our earnings ESP (Expected Surprise Prediction) methodology has to say about them.
Apple, Inc. ( AAPL Quick Quote AAPL - Free Report)
Apple has a Zacks Rank #3. The company is expected to report on Feb 2. The ESP, (which is the difference between the most recent estimate and the consensus, thus capturing the latest factors affecting the company), is +4.42%. When a stock with a Zacks Rank of #1 (Strong Buy), #2 (Buy) or #3 (Hold) has a positive ESP, our data shows that there’s a good chance that it will beat estimates.
Our data from the last five quarters shows that Apple usually beats estimates and there is usually a positive correlation with prices. Therefore, it would be advantageous to buy Apple shares right now.
Alphabet Inc. ( GOOGL Quick Quote GOOGL - Free Report)
Zacks #3 ranked Alphabet has an ESP of -4.85%. Therefore, it isn’t clear whether it will beat estimates when it reports on Feb 2. Here, too, there is positive correlation with prices, which means that another negative surprise will lead to a decline in share prices. So its best to avoid these shares for now.
NVIDIA Corp. ( NVDA Quick Quote NVDA - Free Report)
NVIDIA carries a Zacks Rank #4 (Sell). Therefore, even though ESP is 0, we are unable to predict a positive earnings surprise when it reports on Feb 15. Since there’s also low correlation with prices, it’s hard to tell how investors will react to the news. Therefore, there’s risk in buying these shares now.
Microsoft Corp. ( MSFT Quick Quote MSFT - Free Report)
Microsoft carries a Zacks Rank #3 and its ESP is 0.34%. Therefore, there’s a good chance of a positive surprise when it reports tomorrow, Jan. 24. Positive correlation between the earnings surprise and the price reaction is low, so there may not be a positive reaction to an earnings beat. If the magnitude of surprise is substantial, there will be a positive reaction from investors. Therefore, there’s a fair chance of making some gains if you invest in Microsoft now.
Meta Platforms, Inc ( META Quick Quote META - Free Report)
The #3 rank and ESP of 6.88% increases our confidence in Meta’s chances of beating estimates when it reports on Feb 1. Since there is also positive correlation between the surprise and prices, this could be a good stock to pick up heading into the earnings announcement.
Price Performance in the Last 4 Days Image Source: Zacks Investment Research