Tech has come a long way from the dot-com fiasco to a preferred trade by Wall Street pundits. Computer and software makers are having a ball as the White House’s initiative to trim tax rates are providing the much needed windfall to companies that have mostly hoarded money outside the United States. Republican leaders claim to be united on the tax plan, while the lawmakers, regrettably, have been divided on the same so far this year.
Substantial growth in cloud computing and the Internet of Things, artificial intelligence, gaming and the launches of increasingly complex smartphones and consumer electronics suggest that the good times for tech will keep rolling, at least for now. Lest we forget, the “FAANGtastic five” – Facebook Inc (FB - Free Report) , Apple Inc. AAPL, Amazon.com, Inc. (AMZN - Free Report) , Netflix, Inc. (NFLX - Free Report) and Alphabet Inc (GOOGL - Free Report) have gained in double digits this year. Amazon, in particular, topped the $1000-a-share level, highlighting the stellar show put up by tech stocks this year.
Let us, thus, keep an eye on tech stocks that are likely to make the most of the third-quarter earnings season that has unofficially kicked off this week.
Tech Stocks Could Make Billions Under Trump Tax Plan
Investors continue to pour money into Internet and tech companies, and the most basic thing that is driving them at this point is taxes. Trump has promised to deliver historic relief to corporate America by lowering tax rates. The corporate tax is expected to be slashed from 35% to 20%. This helps tech multinationals to bring funds held overseas back to the United States at a decreased tax rate. Bringing back the tech companies massive overseas cash pile would let it do a combination of share buybacks, pay dividends and get involved in M&A activities.
Let us not forget that tech behemoths Apple, Alphabet, Microsoft MSFT, Cisco Systems, Inc. (CSCO - Free Report) and Oracle ORCL hold 88% of their money overseas to avoid paying the 35% corporate tax rate on earnings. Thus, they are positioned to gain immensely under Trump’s tax reduction plan. Companies like Hewlett Packard Enterprise Co (HPE - Free Report) and QUALCOMM, Inc.’s (QCOM - Free Report) earnings are also projected to rise around 20.8% and 10.5%, respectively, on a repatriation tax cut, per Strategas Research Partners.
The tax plan, in the meanwhile, aims to create three individual tax brackets with rates of 12%, 25% and 35%. The current top rate is 39.6%. The prospect of a cut in personal taxation is also a major driving force in the continued strength of big tech firms. With more cash in hand, investors have more room to invest in such bellwethers.
Q3 Should be Good for Tech
The third-quarter earnings season, historically, is one of the best seasons for tech stocks.
As per hedge fund analytics tool Kensho, 30 days after the start of the third-quarter earnings season, the information technology sector gained an average 4.6% in the last 19 years. Meanwhile, other major sectors including industrials, materials and financials have gained 2.8%, 2.8% and 2.7%, respectively. In fact, the S&P 500 index gained a meagre 2.3% during the said period.
Tech stocks had an impressive 2017 so far, while earnings for tech companies in the third quarter are expected to be up 9.7% on 6.7% higher revenues (read more: Handicapping the Q3 Earnings Season).
Tech Earnings Preview: Cloud Business is a Game Changer
International Business Machines Corp. (IBM - Free Report) will lead the tech earnings parade on Oct 17. Can the company break it’s more than five-year long streak of quarterly revenue decline? It’s cloud revenues had increased 15% in the second quarter, but, that too was nowhere close to the triple-digit growth Microsoft witnessed in the same quarter and 40% growth Amazon reported over the last couple of years. This time around the tech major could, however, see a boost in hardware sales on the back of the security-fortified z14 mainframes introduced in July.
Things are looking up for SAP SE SAP, which will report before the market opens on Oct 19. It saw 33% growth in cloud revenues and a whopping 70% growth in its S/4 Hana business suite in the second quarter. With little competition in its core market, the software and service provider is expected to see strong results in the third quarter in the aforesaid segments.
Meanwhile, all await the releases from Alphabet, Amazon and Microsoft on Oct 26. Alphabet’s dominance in the search marketing business seems to be getting stronger with each quarter, while Amazon continues to lead the cloud space. Investors, however, will be keen to see how Diane Greene-led Alphabet does in the cloud business. In the second quarter, Alphabet reported 33% growth to $2.2 billion in the category “other revenues” that includes cloud.
Microsoft, in the meantime, has almost doubled in the three-and-a-half years since Nadella took over as CEO. The big question is whether the company can maintain growth in its cloud business. So, all eyes are on its Azure product. After all, if we combine Azure and other software-as-a-service products, Microsoft will gain an edge over Amazon in the cloud business.
5 Solid Choices
Technology companies, nevertheless, are likely to see solid growth in Q3 on the back of favorable government policy. This calls for investing in five tech stocks, which are expected to report a significant uptick in Q3 earnings. These stocks have a positive Earnings ESP. This is our proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter. These stocks, in the meanwhile, also flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
HubSpot Inc (HUBS - Free Report) provides a cloud-based marketing and sales software platform. The company has a Zacks Rank #1. It is expected to report earnings results for the quarter ending September on Nov 1. HubSpot has an Earnings ESP of +26.67%. The company’s expected earnings growth rate for the current year is 123.7%.
CGI Group Inc GIB manages information technology (IT) services, as well as business process services (BPS). The company has a Zacks Rank #2. It is expected to report earnings results for the quarter ending September on Nov 8. CGI Group has an Earnings ESP of +2.67%. The company’s expected earnings growth rate for the current year is 11.8%.
NetApp Inc. (NTAP - Free Report) provides software, systems and services to manage and store customer data. The company has a Zacks Rank #1. It is expected to report earnings results for the quarter ending September on Nov 15. NetApp has an Earnings ESP of +0.86%. The company’s expected earnings growth rate for the current year is 14.1%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Paypal Holdings Inc (PYPL - Free Report) is a technology platform and digital payments company that enables digital and mobile payments on behalf of consumers and merchants. The company has a Zacks Rank #2. It is expected to report earnings results for the quarter ending September on Oct 19. Paypal has an Earnings ESP of +0.08%. The company’s expected earnings growth rate for the current year is 22.7%.
MKS Instruments, Inc. (MKSI - Free Report) is a global provider of instruments, subsystems and process control solutions that measures, controls, powers, delivers, monitors and analyzes critical parameters of advanced manufacturing processes. The company has a Zacks Rank #2. It is expected to report earnings results for the quarter ending September on Oct 24. MKS Instruments has an Earnings ESP of +2.74%. The company’s expected earnings growth rate for the current year is 80.6%.
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