Technology sector has been the cynosure of all eyes, both for bad and good reasons, in the first quarter of 2018.
The sector received a lot of flak over a number of issues including Facebook’s data fiasco, Apple’s iPhone-battery slowdown and President Trump’s tariff imposition on Chinese imports. The hallowed FAANG stocks (Facebook, Amazon, Apple, Netflix and Alphabet) were the worst sufferers.
However, increasing demand for cutting-edge technology such as Artificial Intelligence (AI), Augmented/Virtual (AR/VR) reality devices, autonomous cars, advanced driver assisted systems (ADAS) as well as Internet of Things (IoT) related software and hardware continues to boost the growth potential of the technology sector.
Facebook Data Fiasco: Biggest Controversy
Facebook’s data misuse scandal captured the attention of government regulators instantaneously, worldwide. The incident negatively impacted not only the social media stocks but also the overall technology sector.
The social media giant was already facing backlash over the Russian meddling into the 2016 U.S. presidential elections. The Cambridge Analytica incident has now put the company’s data practices under severe scrutiny.
Apple, Expedia, Uber, NVIDIA: All Suffered
Apple also received lot of criticism after it revealed that software updates slowed down iPhones with older batteries.
Moreover, incidents such as the Russian hacking of computers at the 2018 Olympics as well as security breach at Expedia division Orbitz highlighted the security loopholes currently faced by technology providers.
Further, ride-hailing service provider Uber stopped all test drives, after a driverless car crashed in Arizona, killing a pedestrian. The incident also compelled GPU provider NVIDIA to suspend all tests.
Moreover, Trump’s criticism about the company’s business practices severely hurt Amazon during the last few days of the quarter.
Additionally, European Commission’s (EC) decision to impose “digital tax” on tech companies such as Facebook, Amazon, Apple, Netflix and Alphabet has been the cause of major concern among investors.
The U.S.-based technology companies, particularly social-media companies, are already facing an uphill task to comply with the upcoming General Data Protection Regulation (“GDPR”) in the region.
Tech Stocks Still Shine on Growth Potential
Notably, the Technology Select Sector SPDR ETF (“XLK”) returned 2.8% in the year-to-date period compared with the S&P 500’s decline of 1.3%.
The outperformance can be attributed to solid top-line growth driven by strong demand for power-efficient and high-performance chips, DRAM and NAND products, sensors and RFID solutions.
Moreover, rapidly expanding IoT market is driving growth for chip components to power applications, particularly ADAS, medical/healthcare and smart devices. Further, rapid development of 5G platform and technology has evolved as another catalyst for technology providers, particularly semiconductor companies.
The growing demand for cybersecurity solutions also presents significant growth potential. Furthermore, improving IT spending is a positive. Market research firm, Gartner, projects global IT spending for 2018 to rise 4.5%, up from 3.8% in 2017.
According to the latest Earnings Trend, technology sector’s first-quarter earnings are expected to improve 21% from the same period last year on 11.4% higher revenues.
How to Make the Right Pick?
Given the existence of a number of industry players, finding the right stocks that have the potential to beat earnings could be a daunting task. Our proprietary methodology, however, makes it fairly simple for you. You could narrow down the list of choices by looking at stocks that have the combination of a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP.
Earnings ESP 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.
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
Given below are five technology providers that have the right combination of elements to post an earnings beat this quarter:
Paycom Software Inc. (PAYC - Free Report) — Oklahoma City, OK-based Paycom is a provider of a cloud-based human capital management software solution delivered as Software-as-a-Service. We note that the company has beaten the Zacks Consensus Estimate in the trailing four quarters, with an average positive earnings surprise of 30.16%.
The company is scheduled to release first-quarter 2018 results on May 1. Currently, Paycom has an Earnings ESP of +0.33% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Western Digital Corporation (WDC - Free Report) — San Jose, CA-based Western Digital is the largest hard disk drive (HDD) producer in the United States. We note that the company has beaten the Zacks Consensus Estimate in the trailing four quarters, with an average positive earnings surprise of 6.43%.
This Zacks Rank #1 stock has an Earnings ESP of +0.82%. The company is set to report third-quarter fiscal 2018 results on Apr 26.
CACI International Inc. (CACI - Free Report) — Based in Arlington, VA, CACI International delivers IT applications and infrastructure to improve communications, and secure the integrity of information systems and networks, enhance data collection and analysis, as well as increase efficiency and mission effectiveness. We note that the company has surpassed the Zacks Consensus Estimate in the trailing four quarters, with an average positive earnings surprise of 12.54%.
This Zacks Rank #2 stock has an Earnings ESP of +15.41%. The company is set to report third-quarter fiscal 2018 results on May 2.
Fortinet Inc. (FTNT - Free Report) — Headquartered in Sunnyvale, CA, Fortinet is a provider of network security appliances and Unified Threat Management (“UTM”) network security solutions to enterprises, service providers and government entities worldwide. Notably, the company has outpaced the Zacks Consensus Estimate in the preceding four quarters, with an average positive earnings surprise of 20.1%.
The company is slated to report first-quarter 2018 results on May 3. Currently, Fortinet has an Earnings ESP of +0.60% and a Zacks Rank #2.
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