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Forget Meta-Led Slump: 3 Reasons to Buy Tech ETFs on the Dip
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Meta Platforms Inc. (META - Free Report) , the parent company of Facebook, saw a stock slump of 15.2% in after-hours trading on Apr 24, 2024, as disappointing revenue guidance for the current quarter and plans for increased capital expenditures outshined the earnings beat. Meta, being a member of “Magnificent Seven,” has the ability to pull strings in the broader technology market. No wonder, the tech-heavy Invesco QQQ TrustETF (QQQ - Free Report) dropped 1.1% after hours.
Despite Meta's intentions to utilize AI in its operations, the current outlook doesn't suggest many benefits from AI adoption. Jack Ablin, Chief Investment Officer at Cresset Wealth Advisors, said that the lack of clarity on AI's benefits to users and the absence of visible cost savings are key concerns for investors, per a Bloomberg article.
Broader Tech Market Impact
The repercussions extended beyond Meta are hurting other key tech players. Alphabet Inc. and Microsoft Corp. experienced declines of around 3.3% and more than 2.5%, respectively. Social media companies such as Snap Inc. (down 5.2% after hours), Pinterest Inc. (down 4.4% after hours) and Reddit Inc. (down 1% after hours) saw notable drops, indicating uneasiness in the broader market.
Should You Ignore Meta-Led Slump & Bet on Broader Tech ETFs on the Dip?
Let’s discuss a few factors that indicate why investors should not turn their faces from the tech investing arena and why subdued revenue growth could be a new normal for tech companies. Technological advancements are part and parcel of our lives and so should tech ETFs be in our portfolios. In the last 20 years, Technology Select Sector SPDRETF (XLK - Free Report) witnessed a 11.05% compound annual U.S. inflation-adjusted return, while the figure has been 17.35% over the past 10 years.
Easy Comps Likely Receding for Big Tech: Time to Get Accustomed?
UBS Global Research has revised its outlook for the "Big Six" tech companies — Apple, Amazon, Google-parent Alphabet, Meta, Microsoft and NVIDIA — from "Overweight" to "Neutral," according to a recent statement by Jonathan Golub, the chief U.S. equity strategist at UBS Investment Bank, according to a source.
Golub said that the downgrade is not based on rich valuations or concerns about the sustainability and momentum of the AI technology. Instead, he pointed out that tough comps compared to the pandemic period will pose threats to future growth rates.
A reduction in costs and easy comparisons boosted big tech companies’ profits, which peaked in the fourth quarter of 2023. But this jump will likely be followed by a decline in earnings, going forward. Since the tech sector’s solid fundamentals are still in place, investors should not worry much about tougher comps.
Strong Long-Term Future for Tech
“New normal” trends like work-and-learn-from-home and online shopping, increasing digital payments and growing video streaming are sure to stay here even if the pandemic has ebbed. The growing adoption of cloud computing, and the ongoing infusion of AI, machine learning and IoT are the other winning areas.
We can definitely witness some occasional hits and misses in AI integration and monetarization, but the long-term future is bullish. The global artificial intelligence market size is projected to experience a compound annual growth rate (CAGR) of 37.3% from 2023 to 2030, per GrandViewResearch, as quoted on Forbes.
Some budding areas like AI, and still-nascent areas like metaverse, may be causing companies cash outflows, but these initiatives could turn out to be the future of the tech sector, if executed properly.
Will Likely Fed Rate Cuts in 2025 Favor Tech Stocks?
Meta’s increased capex plan may be bothering investors today as interest rates are currently high in the United States. But there are chances of the Fed slashing rates from late 2024, an easing activity, which should gather more momentum in 2025. If the Fed eases policies, tech stocks will likely have a new lease of life. Lest we forget, the U.S. tech sector had a blockbuster 2020 due to easy money policy despite the lockdown.
ETFs in Focus
So, don’t shy away from the tech sector altogether. Below, we highlight a few tech ETFs that have a relatively low P/E (notably, the Nasdaq’s P/E ttm is 27.15X) and appear as compelling bets for the long-term.
Image: Bigstock
Forget Meta-Led Slump: 3 Reasons to Buy Tech ETFs on the Dip
Meta Platforms Inc. (META - Free Report) , the parent company of Facebook, saw a stock slump of 15.2% in after-hours trading on Apr 24, 2024, as disappointing revenue guidance for the current quarter and plans for increased capital expenditures outshined the earnings beat. Meta, being a member of “Magnificent Seven,” has the ability to pull strings in the broader technology market. No wonder, the tech-heavy Invesco QQQ Trust ETF (QQQ - Free Report) dropped 1.1% after hours.
Despite Meta's intentions to utilize AI in its operations, the current outlook doesn't suggest many benefits from AI adoption. Jack Ablin, Chief Investment Officer at Cresset Wealth Advisors, said that the lack of clarity on AI's benefits to users and the absence of visible cost savings are key concerns for investors, per a Bloomberg article.
Broader Tech Market Impact
The repercussions extended beyond Meta are hurting other key tech players. Alphabet Inc. and Microsoft Corp. experienced declines of around 3.3% and more than 2.5%, respectively. Social media companies such as Snap Inc. (down 5.2% after hours), Pinterest Inc. (down 4.4% after hours) and Reddit Inc. (down 1% after hours) saw notable drops, indicating uneasiness in the broader market.
Should You Ignore Meta-Led Slump & Bet on Broader Tech ETFs on the Dip?
Let’s discuss a few factors that indicate why investors should not turn their faces from the tech investing arena and why subdued revenue growth could be a new normal for tech companies. Technological advancements are part and parcel of our lives and so should tech ETFs be in our portfolios. In the last 20 years, Technology Select Sector SPDR ETF (XLK - Free Report) witnessed a 11.05% compound annual U.S. inflation-adjusted return, while the figure has been 17.35% over the past 10 years.
Easy Comps Likely Receding for Big Tech: Time to Get Accustomed?
UBS Global Research has revised its outlook for the "Big Six" tech companies — Apple, Amazon, Google-parent Alphabet, Meta, Microsoft and NVIDIA — from "Overweight" to "Neutral," according to a recent statement by Jonathan Golub, the chief U.S. equity strategist at UBS Investment Bank, according to a source.
Golub said that the downgrade is not based on rich valuations or concerns about the sustainability and momentum of the AI technology. Instead, he pointed out that tough comps compared to the pandemic period will pose threats to future growth rates.
A reduction in costs and easy comparisons boosted big tech companies’ profits, which peaked in the fourth quarter of 2023. But this jump will likely be followed by a decline in earnings, going forward. Since the tech sector’s solid fundamentals are still in place, investors should not worry much about tougher comps.
Strong Long-Term Future for Tech
“New normal” trends like work-and-learn-from-home and online shopping, increasing digital payments and growing video streaming are sure to stay here even if the pandemic has ebbed. The growing adoption of cloud computing, and the ongoing infusion of AI, machine learning and IoT are the other winning areas.
We can definitely witness some occasional hits and misses in AI integration and monetarization, but the long-term future is bullish. The global artificial intelligence market size is projected to experience a compound annual growth rate (CAGR) of 37.3% from 2023 to 2030, per GrandViewResearch, as quoted on Forbes.
Some budding areas like AI, and still-nascent areas like metaverse, may be causing companies cash outflows, but these initiatives could turn out to be the future of the tech sector, if executed properly.
Will Likely Fed Rate Cuts in 2025 Favor Tech Stocks?
Meta’s increased capex plan may be bothering investors today as interest rates are currently high in the United States. But there are chances of the Fed slashing rates from late 2024, an easing activity, which should gather more momentum in 2025. If the Fed eases policies, tech stocks will likely have a new lease of life. Lest we forget, the U.S. tech sector had a blockbuster 2020 due to easy money policy despite the lockdown.
ETFs in Focus
So, don’t shy away from the tech sector altogether. Below, we highlight a few tech ETFs that have a relatively low P/E (notably, the Nasdaq’s P/E ttm is 27.15X) and appear as compelling bets for the long-term.
Invesco PHLX Semiconductor ETF (SOXQ - Free Report) – P/E: 15.08X; Zacks Rank #1 (Strong Buy)
First Trust Technology AlphaDEX Fund (FXL - Free Report) – P/E: 19.23X; Zacks Rank #1
First Trust NASDAQ Technology Dividend Index Fund (TDIV - Free Report) – P/E: 19.33X
Fidelity Cloud Computing ETF (FCLD - Free Report) – P/E: 20.92X
Technology Select Sector SPDR Fund (XLK - Free Report) – P/E: 23.77X; Zacks Rank #1