Spillover from the recent global market rout has challenged the tech sector, and the stronger dollar isn’t helping either. Apple stated in its Q1 fiscal 2016 earnings that dollar appreciation cost it $5B in revenues – at constant currency, its revenues would have been $80.8B versus $75.9B. Its revenue growth, though a positive +2%, could have been a much higher +8% had currency mismatches not occurred.
Still, Zacks Investment Management sees the technology sector’s longer-term growth prospects as bright. For example, Alphabet’s (Google’s) plans to provide free “Fiber” super-speed internet connections to lower-income homes in Kansas City portends opportunity. Armed with 1,000 Mbps bandwidth, that far exceeds average speeds of 12.6 Mbps, Fiber could turn out to be Google’s trump card. Additionally, its recent stock performance has been stellar, buoyed by year-over-year earnings growth of +45.3% and +5.3%, respectively, in third and fourth quarters of 2015. Additionally, Alphabet’s shares rose by more than +25% in the past year through March 2, 2016. What’s more, there are possibilities Alphabet could occupy more than 30% of the mobile advertising space.
Then, there’s Facebook which is already a dominant player in the mobile ad space and boasted a +14% increase in users in 2015 from the previous year. Facebook’s shares have increased more than +34% in the past year through March 2, 2016 on the back of strong fundamentals: its earnings growth rate for the last two quarters of 2015 were +11.2% and a whopping +122.8%, respectively, from the same quarter the previous year.
Information Technology (IT) and IT-enabled services is another industry that holds promise as business models evolve to address consumer needs through innovation. For example, many companies are beginning to provide cloud-based infrastructure to drive increased operational efficiency. With more efficient data management tools, resources can focus on developing newer and better products. This is reflected in equity performance of bellwether companies like Accenture Plc and Cognizant Technology Solutions – in 2015, they posted equity gains of more than +17%% and +13%, respectively, besting the broader S&P 500 which is down -0.7% over the same period.
Earnings Remain Strong
Continued groundbreaking innovation often enables the tech sector to bounce back from less favorable times. The sector posted solid year-on-year earnings growth of +10.1%, +2% and +5.9%, respectively, in the first three quarters of 2015. And, even as shorter-term headwinds suppress growth, Zacks Investment Management predicts this sector will undergo positive gains in the last three quarters of this year from the previous year. As of March 2, 2016, the S&P 500 Information Tech sector performed better than the overall market in the past year – the S&P 500 Information Tech has slipped around -3.4% versus the broader S&P 500’s (price only) decline of -5.8%.
Bottom Line for Investors
While volatility is certainly affecting some areas of Tech, the overall sector’s fundamentals are not yet doomed. With struggling economies in Europe and Japan actively pursuing expansionary measures, the prospects for the U.S. technology market should brighten once the global expansion presses on. Being the lifeblood of modern global growth, the technology sector continues to grow through innovations in products and business operating strategies. Zacks Investment Management currently has a favorable outlook for this sector, with emphasis on semiconductors and computer-software services.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.