It’s Earnings Season for Tech Stocks
The technology industry is still one of the most popular destinations for stock investors due to its dynamic nature. According to industry estimates, earnings from tech stocks are expected to take a leap of 9.7%, which is up from 6.75% from the same period last year.
A lot of the investor optimism, regarding the tech sector, can be seen in the year to date performance of technology companies’ shares. In fact, the technology sector has far outstripped the performance of the S&P index during this period. Most notably, a major indicator of the sector’s health is the Technology Select Sector SPDR ETF (XLK), which returned 24.8% in earnings within the year to date period. This is compared to 14% in gains from the S&P index.
What Is Driving the Push Toward Tech Stocks?
The tech sector is profiting from the increased demand from businesses for cloud-based computing as well as the increased adoption of Augmented/Virtual Reality Solutions, advanced driver assisted systems, autonomous vehicles, the Internet of Things, artificial Intelligence systems, big data and other related technology services.
Besides this, the rapid development of 5G cellular networks is something that could prove to be the next catalyst for growth. In addition, the adoption of blockchain in recent years across multiple industries is likely to be another development that will change the game in the tech sector.
Moreover, spending on IT services is expected to recover in the final part of 2017, which is a good omen for the tech sector. Looking at research reports, Gartner Projects expects its tech spending to increase by 2.4 % in 2017, instead of the rise of only 0.3% in 2016.
However, all the optimism needs to be tempered by the shortage of essential computer system components, LCD panels, DRAM and SSD drives, a factor that has been pushing up PC prices and lowering the volume of PC shipments.
If you are a keen follower of technology stocks, you will know that Apple (AAPL) has seen its stock price grow by over 800% since the debut of the iPhone over a decade ago. This is over 12 times the return seen by the S&P 500 within the same period.
Despite a string of recent setbacks, Apple has gotten its house in order lately. This includes a 5% rise in the price of its stock in a single day at the start of August. This can be attributed to its investors being encouraged by news that iPhone sales are still as strong as ever.
In addition, Apple is back on a growth trajectory, with the company’s revenues expected to jump by 15% within the next fiscal year and earnings expected to climb 20%. A major launch of the company’s new iPhone could put it on a major path for growth.
Although all of these points are familiar to Apple watchers, there is an often overlooked bull base for this stock – Apple’s services segment. This includes the royalties that the company earns on the digital content it offers on its iTunes platform, the fees that it gathers from Apple Pay as well as other revenue streams that it has behind the scenes. It may come as a surprise to many investors, but this segment has steadily grown to rake in about $30 billion in annual sales for the company. Besides, the most recent earnings report projects that this figure will grow by 22% year over year.
Facebook Inc. (NASDAQ:FB) is a company that has always reported earnings reports that leave many investors and financial experts drooling. For this reason, the tech giant’s stock is up by a ridiculous 56% from the start of the year. While such phenomenal growth makes it a turn-off for many investors expecting the bubble to burst, is there really anything that can hold Facebook down?
Whether you like it or not, Facebook has quickly become an integral part of most of our daily lives. Whether you need something to pass the time on a train commute, winding down on your couch in the evening, or keeping up with friends and family, scrolling through your Facebook account is something that is an established habit.
The result of this is that the app has seen phenomenal user growth and, as a result, increased revenues. In the last quarter, Facebook reported that it has 1.32 billion daily active users (DAU) and more than 2 billion monthly active users (MAUs). Both of these figures showed a growth of 17% over the past year. One thing to keep in mind is that these figures were reported for the financial quarter that ended in June, so it is reasonable to expect that they have grown since then.
Besides, Instagram, also owned by Facebook, has seen exponential growth in the same period. For example, Instagram Stories now has more DAUs than Snapchat. As a matter of fact, Snapchat missed both its revenue and earnings estimates over two quarters, leading investors to fear for its growth. In comparison, Facebook has exceeded its earnings metrics over nine quarters in a row.
Is there anything more anyone can say about Tesla (NASDAQ:TSLA)? This is a company whose stock has continually outperformed expectations, rising by more than 1000% in the last five years. In fact, the company seems to be way ahead on its long-term strategy toward making electric, autonomous vehicles and solar energy affordable to the average consumer. Tesla has now managed to make itself a household name alongside marquees like BMW, Ford and General Motors.
Right now, Tesla is selling a huge number of cars, which can be attributed to its release of the relatively affordable Model 3 sedan. In August, the company reported that it had received over 400,000 pre-orders for the vehicle, in addition to getting 1,800 orders for the Model 3 every day. When you consider that the company has the capacity to manufacture only 20,000 vehicles every month, it is an order backlog that would make any car company envious.
It is therefore no surprise that with this huge number of orders, the car company’s finances are in rude health. The company has a $3 billion cash stash, with its revenues in the second quarter of 2017 up by 119.7% over the past year.
Technology stocks are now undergoing a correction within a bullish market segment. In 2017, tech stocks have been the market leaders, making this correction a natural progression. While many analysts expect the market to implode, there is no ‘tech bubble’ such as there was in 1999-2000.
The inflation environment and lower interest rates mean that technology firms can easily convert their high gross into large profit margins. If you are a believer in the current bull market and the companies leading the charge, there is no better time to benefit from the earnings season in the tech stock segment.