Zacks Investment Research | Apr 29, 2020 08:00AM ET
Tech stocks and ETFs took a beating on Apr 28 as investors prepared to weigh the real strength of the upcoming big tech earnings. As a result, the tech-heavy Nasdaq (NASDAQ:NDAQ) underperformed (down 1.4%) the S&P 500 (down 0.5%) and the Dow Jones (down 0.13%) yesterday. Technology Select Sector SPDR Fund GOOGL kicked off the big tech releases on a strong note. Alphabet stock, which lost 3% on Apr 28, surged about 8% after hours on upbeat earnings results, causing after-market gains in several tech ETFs. Not only this, stock futures started trading in positive territory at the time of writing.
Investors were worried about a probable decline in advertising revenues for some tech giants. But the stay-home mandates boosted Alphabet’s ad revenues. YouTube ad revenues grew about 33% year over year, while total ad revenues increased more than 10%. Google Cloud jumped a solid 55% and now forms about 6.7% of its top line.
However, the company noted that the performance was strong during the first two months of the quarter, but a considerable slowdown in ad revenues was noticed in March.
Why Join the Tech Space
The results ruled out investors’ fear about Facebook (NASDAQ:FB) Microsoft ETFs to Watch on Surging Cloud Ahead of Q3 Earnings ).
Amazon.com Inc (NASDAQ:AMZN). AAPL will report on Apr 30 after market close.
Tech earnings are likely to decline 0.7% in Q1 of 2020 on 4.6% higher revenues. This is in contrast to a 15.3% slump in S&P 500 earnings on 1.2% increase in revenues. The technology sector is among the very few outperformers in the otherwise-downbeat earnings trends. Estimated long-term EPS growth rate for the tech sector is 12.6% versus 8.4% of the S&P 500.
Tech companies are cash-rich. As of fourth-quarter 2019, cash, cash equivalents and marketable securities was around $452.5 billion. Microsoft was the "Cash is King:" Buy These Tech ETFs to Beat Coronavirus ).
From the price/cash flow (P/FCF) angle, the tech sector is slightly cheaper than the S&P 500. Investors should also note that the P/FCF ratio of the computer and technology market now stands at 19.2x against the S&P 500 Composite Market ETF’s P/CF of 20.8x.
Tech sector’s debt profile is also impressive. Debt as a proportion of equity of the tech sector is 61.4% versus 82.7% of the S&P 500. Long-term debt as a percentage of capital is 38.4% versus 43.6% for the S&P 500 as a whole.
Investors should also note that hoarding cash could be a great strategy for the near term. Fund managers are of the view that “looking for companies that have strong balance sheets, less debt, stable cash flows and carrying a respectable dividend yield are the preferred plays.”
Against this backdrop, we highlight a few Zacks Rank #1 (Strong Buy) tech ETFs that could be bought on the recent dip.
Technology Select Sector SPDR ETF (NYSE:XLK) XLK
iShares Expanded Tech-Software Sector ETF IGV
Vanguard Information Technology ETF VGT
Fidelity MSCI (NYSE:MSCI) Information Technology Index ETF FTEC
iShares U.S. Technology ETF IYW
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