The tech rally continues to roll on. Last week’s stellar numbers from three big tech stocks – Amazon (AMZN), Microsoft (MSFT) and Alphabet (GOOGL) – pushed the NASDAQ index even higher.
Technology firms have driven 2017’s equity bull market, particularly in the US, despite a mid-year pause as investors took stock of perceived high valuations.
Now, three-fifths of the way through September’s earnings season for the big tech stocks quintet, known as FAAMG, which also includes Apple (AAPL) and Facebook (FB), the sector is back in favour after smashing analyst forecasts.
‘Super Thursday’ saw Amazon and Google’s share prices smash through the $1,000 barrier to all-time highs. Microsoft also surged to a record high, helping the tech-heavy NASDAQ Composite end Friday at a record high.
Amazon’s revenues of $43.7 billion beat consensus and was up 34% year-on-year, with Whole Foods, its August acquisition, adding $1.3 billion. North American sales were up 35% and Amazon Web Services up 42%. That said, the firm continues to invest apace, clocking up a 35% increase in expenses.
Alphabet also beat expectations, with revenue of $27.8 billion up 24% year-on-year led by its Google advertising revenue, which represented 87% of revenues and was up 21%.
Jeremy Gleeson, manager of the AXA Framlington Global Technology fund, told Morningstar reaction to the “good set of results” was amplified due to prior concerns the numbers would turn out to be below company-guided metrics.
Microsoft posted 12% revenue growth to $24.5 billion, almost $1 billion more than predicted. It also hit its target of a $20 billion annualised revenue run rate for its commercial cloud business.
Morningstar analysts raised their fair values for all three, but still rate them three stars, suggesting they are fairly priced. Hold, for the time being at least, could be the smart call.
Analyst Ali Mogharabi says that Alphabet, in particular, is a high-uncertainty name, recommending “a wider margin of safety before allocating capital towards” the stock. Further, “shares [in Microsoft] are beginning to approach full value on the back of these results”, adds Rodney Nelson.
Apple and Facebook both report this week, though Gleeson says Apple’s numbers will “tell us very little” due to a lack of numbers on its flagship iPhone X product. That will have to wait for its January quarter.
Alternative Stocks to the Big 5
Gleeson asserts that it’s been a broad-based bull market, with small and mid caps helping supplement gains from their more-established rivals.
He describes his fund as “benchmark-aware, not benchmark-tracking”. He will own large-cap names where he has high conviction, evidenced by his top three holdings – Alphabet, Apple and Facebook – accounting for a quarter of his portfolio.
But where he has low conviction, he will find other companies to invest in. This means he does not own Microsoft. Instead, he gets exposure to areas the DC-based company operates in through three others.
Arista Network (ANET) acts as a proxy for Microsoft’s Azure platform as it buys a lot of equipment from them; Proofpoint (PFPT) is favoured for cloud computing purposes; while Red Hat (RHT) gives exposure to Linux, an open-source software system used by Microsoft. They are up 103%, 28% and 74% year-to-date respectively.
He notes that one big shift in consumer behaviour that benefits Amazon, Microsoft and Google is a move in corporate IT spend away from traditional on-premise hardware and software equipment towards off-premise, or cloud-based, alternatives.
So, if you’re in the right areas, “you can still be seeing significant growth” despite flat IT spending overall. Hewlett Packard (HPE) and Dell (DVMT) are examples of companies in the wrong areas and are likely to be “the losers in this transition”.
Which Tech Companies Do the Experts Own?
A look at five of the best performing technology funds using Morningstar’s X-Ray tool unsurprisingly shows FAAMG are the most widely owned stocks, though only Apple is in all five portfolios.
Being global in their remits, Chinese giants Tencent (0700) and Alibaba (BABA) make an appearance, as does South Korean behemoth Samsung (005930).
Another that is owned by all five funds is £8 billion Salesforce.com (CRM). It pioneered is the largest pure-play software-as-a-service company in the world and also offers customer relationship management in many industries. The stock is up almost 50% year-to-date.
“We think Salesforce.com’s prowess and broadening application portfolio will propagate the firm’s rise in the global software market,” says Nelson.
