The technology sector is piping hot and leading the market rally this year buoyed by the surging FANG stocks. This is especially true as PowerShares QQQ (QQQ - Free Report) tacking the Nasdaq-100 Index has surged 21.1% from a year-to-date look compared with gains of 9.1% for the broad market fund (SPY - Free Report) and 7.3% for DIA.
Additionally, the emergence and extensive adoption of new technology such as cloud computing, big data, Internet of Things, wearables, drones, virtual reality devices, and artificial intelligence are fueling growth in the sector. The combination of other factors including improving global fundamentals, strong corporate earnings, a rising interest rate scenario, and Trump’s proposed corporate tax reform are acting as additional catalysts (read: 5 Ways to Play Unstoppable Tech Rally with ETFs).
In particular, FANG stocks have gained more than 30% on average in the year-to-date timeframe with Amazon (AMZN - Free Report) and Alphabet (GOOGL - Free Report) recently joining the $1,000 club. Amazon is the fifth company and Alphabet is the sixth to have a quadruple digit price tag after Berkshire Hathaway's Class A shares BRK-A, Seaboard Corp. SEB, NVR Inc. (NVR - Free Report) and Priceline .
Amazon has surged 34.7% this year thanks to solid e-commerce sales and the fast-growing cloud computing business – Amazon Web Services. Additionally, the online e-commerce behemoth has started to make bigger moves into media and advertising and other streams of revenue generation by building air cargo hubs, leasing planes, purchasing trucks and designing drones. The ramp up of its brick-and-mortar business is also encouraging.
Increased usage of YouTube, Google Play, and Google search led to Alphabet’s share price soaring to $1000. Further, expansion in the emerging markets of artificial intelligence, fiber networks, and self-driving vehicles are fueling growth opportunities that are pushing the price up. Shares of online advertisement giant are up 26.7% so far this year.
Amazon versus Alphabet
Both stocks have a top Growth Style Score of A, suggesting that they are primed for strong growth. However, Alphabet looks cheaper at the current levels as it is currently trading at a P/E ratio of 29.14 versus 153.71 for Amazon. Based on this metric, GOOGL looks attractive, creating an opportunity for investors to tap the highflying stock at this level.
Alphabet has a solid Zacks Rank #2 (Buy) and a solid Zacks Industry Rank in the top 26% with an average target price of $1042.36, as per the analysts compiled by Zacks. Further, about 92% of the analysts have a Strong Buy or Buy rating on Alphabet. While the company’s earnings are expected to grow 23.41% this year compared with the industry average of 30.51%, revenues will likely increase 19.45%, much higher than the industry growth of 5.65% (read: ETFs in Focus After Alphabet's Impressive Q1 Show).
On the other hand, Amazon has a Zacks Rank #3 (Hold) with a solid Zacks Industry Rank in the top 23%. Earnings and revenues are estimated to grow 34.1% and 22.2%, respectively, much higher than the respective average industry growth of 20.82% and 4.59%. According to the analysts compiled by Zacks, AMZN has an average target price of $1056.13, with about 80.6% of the analysts having a Strong Buy or a Buy rating.
ETFs to Bet On
Based on the above discussion, Alphabet seems like a more solid choice given its Zacks Rank #2 and relatively cheap valuation. As such, investors could bet on GOOGL in a basket form with iShares U.S. Technology ETF IYW, Select Sector SPDR Technology ETF (XLK - Free Report) , andMSCI Information Technology Index ETF (FTEC - Free Report) . Alphabet accounts for 6.47% share in IYW, 5.56% share in XLK and 5.2% share in FTEC. These funds have gained 22.6%, 19.2% and 21.7%, respectively, year to date.
IYW has a Zacks Rank #1 (Strong Buy) while XLK and FTEC have a Zacks Rank #2 each. Here, XLK is the ultra-popular play and provides exposure to the broad tech space (see: all the Technology ETFs here).
Meanwhile, investors could bet on Amazon’s growth story with the help of VanEck Vectors Retail ETF (RTH - Free Report) , Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report) and Fidelity MSCI Consumer Discretionary Index ETF FDIS. AMZN occupies the top position in these ETFs with a double-digit exposure each. XLY and FDIS have gained 11.8% so far this year while RTH has added 9.5%.
While RTH has a Zacks Rank #1, XLY and FDIS have a Zacks Rank #3 (Hold). XLY is more popular and liquid with AUM of $12.8 billion.
Investors seeking to invest in both companies at the same time could look at First Trust Dow Jones Internet Index (FDN - Free Report) ,PowerShares QQQ (QQQ - Free Report) , and First Trust Cloud Computing ETF (SKYY - Free Report) . Amazon accounts for 8.9% in FDN, 7.1% share in QQQ and 5.2% share in SKYY. Meanwhile, Alphabet makes up for 5.25% share in FDN, 4.4% in QQQ and 4.9% in SKYY. These funds are up 22.2%, 17.1% and 21.4%, respectively. FDN and SKYY have a Zacks Rank #2 while QQQ has a Zacks Rank #1 (read: Inside the 5 Top Performing Stocks of the Nasdaq ETF).
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