Tech stocks have been investors’ darlings this year despite the coronavirus outbreak. In fact, social distancing norms enacted globally to mitigate the spread of the virus compelled people to stay at home, binge online and work as well as learn from home. This new lifestyle has boosted various corners of the technology sector, ranging from enterprise cloud computing, cyber security, remote communications, video gaming and e-commerce to online payments.
The broader tech ETF
Technology Select Sector SPDR Fund (has gained 16.8% past month versus 14.3% gains in the S&P 500. The tech fund is down only about 2% compared with 12.4% decline in the S&P 500. XLK Quick Quote XLK - Free Report) Has the Rally Been Uninterrupted?
Sailing hasn’t been all that smooth for the tech sector so far as it also hit some rough waters in between. President Donald Trump’s forewarning of a temporary suspension of immigration due to virus spread dealt a blow to the tech stocks in mid-April. The U.S. tech sector is heavily reliant on immigrants.
Then, there was a sharp drop (down 7.6%) in shares of
Amazon AMZN on May 1 due to earnings weakness and weak outlook. Since Amazon was one of the key contributors of the April rally, such underperformance wasn’t taken lightly by investors. As a result, the tech-heavy Nasdaq took a beating to start the month. Have Patience, Tech Appears to Have More Room to Run
Coming to the Amazon incident, it is entirely case-specific and should not derail market momentum as we already had a bunch of inspiring big tech earnings this season from the likes of
Facebook FB, Microsoft MSFT and Alphabet ( GOOGL Quick Quote GOOGL - Free Report) .
Some corners of the technology industry – cloud computing, internet and video gaming – are already benefiting from the stay-at-home trends. But those corners that were the social-distancing victims may also turn around with the full reopening of economies.
One such area is smartphones.
Micron Technology ( MU Quick Quote MU - Free Report) — one of the world’s largest producers of DRAM and NAND flash memory chips that are the key building blocks in smartphones and cloud computing technologies — lately indicated that demand for smartphones in China has started to rebound post-coronavirus lockdown. This is great news for semiconductor companies as well as the likes of Apple AAPL. Apple CEO Tim Cook also took notice of recovering demand in China through April.
Widening the presence and stepping beyond the core operation has become the big tech companies’ mantra in recent times. In a bid to be part of the hot video-gaming industry (which has seen immense growth amid lockdowns), Facebook too launched its first game streaming app, Facebook Gaming, on Apr 21. Such initiatives will pay off in the medium term.
Strong Fundamentals of the Tech Sector
Tech earnings are likely to
grow 2.8% in Q1 of 2020 on 6.2% higher revenues. This is in contrast to a 12.5% slump in S&P 500 earnings on 2.1% increase in revenues. The technology sector is among the very few outperformers in the otherwise-downbeat earnings trends.
Tech companies are cash-rich. As of fourth-quarter 2019, cash, cash equivalents and marketable securities was around $452.5 billion. Microsoft was the
most cash-rich company globally, with about $134 billion in cash balance. Tech sector’s debt profile is also impressive. Debt/equity ratio of the sector is 0.15x versus 0.72x of the S&P 500-based ETF ( IVV Quick Quote IVV - Free Report) (read: "Cash is King:" Buy These Tech ETFs to Beat Coronavirus). ETFs With More Room to Run
Against this backdrop, we highlight a few tech ETFs that are still away from their 52-week highs despite the recent rally. This shows these ETFs have more room to run. Though the sector has a higher forward P/E (22.53x) than the S&P 500 (19.01x), more upside is indicated on strong fundamentals. Moreover, the below-mentioned ETFs come from areas that are likely to do well with or without coronavirus (see
all Technology ETFs here). Invesco Dynamic Semiconductors ETF (– 17.9%from 52-Week High, Up 17.6% past month PSI Quick Quote PSI - Free Report) SPDR S&P Software & Services ETF (– Down 18.2%from 52-Wk High, up 22.3% past month XSW Quick Quote XSW - Free Report) First Trust Cloud Computing ETF ( – Down 16.5%from 52-Wk High, up 19.1% past month SKYY Quick Quote SKYY - Free Report) iShares U.S. Technology ETF (– Down 11.9%from 52-Wk High, up 18.2% past month IYW Quick Quote IYW - Free Report) Global X Social Media ETF – Down 11.8% from 52-Wk High, up 18.3% past month SOCL) Want key ETF info delivered straight to your inbox?
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