On May 4, technology stocks suffered a blow on Wall Street following market participants’ concerns over rising inflation in the near future and the possibility of an earlier-than-expected hike in the benchmark interest rate by the Fed.
In an interview with the Atlantic magazine, Treasury Secretary Janet Yellen said that the Fed may need to hike the benchmark interest rate to prevent the economy from overshooting. A higher interest rate is detrimental to growth-oriented companies, especially the technology companies.
Moreover, rising input costs, especially high-end chipsets, due to coronavirus-led supply-chain disruptions and Biden administration’s proposed hiking of corporate tax rate from the existing 21% to 28% are likely to dent technology companies’ profit margins.
Consequently, the tech-heavy Nasdaq Composite slid 1.9%, marking its biggest single-day decline since Mar 24. The Technology Select Sector SPDR (XLK), one of the 11 broad sectors of the benchmark S&P 500 Index, dropped 1.8%.
However, all is not disappointing for the highly innovative technology sector. A few technology behemoths (market capital > $50 billion) recently released impressive earnings results for the last quarter. Notably, a handful of them currently have a favorable Zacks Rank. Investment in these stocks is likely to be prudent for one’s portfolio.
Technology is the Best Bet in the Long Term
We must not forget that growing demand for hi-tech superior products has been a catalyst for the sector in an otherwise tough environment. A series of breakthroughs in 5G wireless network, cloud computing, predictive analysis, AI, self-driving vehicles, digital personal assistants and IoT, have given a boost to the overall space.
The leading emerging markets of Asia, Latin America, Africa and some European countries are still way behind in using digital technology compared with the developed world. While mobile phone penetration is nearly 90% in these countries, a large number of people are still using phones with old features, since voice communication and not data served most of their needs. Even those, who are using smartphones, rarely utilize the online digital features.
However, the outbreak of coronavirus quickly changed the lifestyle and lookout of these people. People were not entirely used to digital platforms for doing office work (work from home), ordering food and other daily needs or transferring money and making payments. Moreover, online schooling, video conferencing and virtual networking have now become essential.
The countries that are more digitized have been able to minimize their losses during the pandemic. These are major lessons for the other countries. Even those who are less inclined toward digital technology and online platforms, either because they have to learn using smartphones or tablets or due to fear of data theft, are now enjoying the massive advantage of online platforms.
Our Top Picks
We have narrowed down our search to five technology giants that declared impressive earnings results in April in the last reported quarter. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows the price performance of our five picks year to date.
Apple Inc. AAPL reported second-quarter fiscal 2021 earnings of $1.40 per share that beat the Zacks Consensus Estimate by 40% and jumped 118.8% year over year. Net sales increased 53.6% year over year to $89.58 billion, which surpassed the Zacks Consensus Estimate by 15.4%.
Apple’s Services and Wearables businesses are expected to drive top-line growth in fiscal 2021 and beyond. Its focus on autonomous vehicles and augmented reality/virtual reality (AR/VR) technologies presents growth opportunity in the long haul.
This Zacks Rank #1 company has an expected earnings growth rate of 54.3% for the current year (ending September 2021). The Zacks Consensus Estimate for the current year improved 12.4% over the last 7 days. It has a current dividend yield of 0.62%. The stock is currently trading at 11.9% below its 52-week high.
Alphabet Inc. GOOGL reported first-quarter 2021 non-GAAP earnings of $26.29 per share that crushed the Zacks Consensus Estimate by 68% and surged 166.4% year over year. Net revenues — excluding total traffic acquisition cost or TAC — came in at $45.60 billion that outpaced the Zacks consensus mark by 7.4%.
Alphabet has been showing increased appetite in the Home Assistant space. The company is focused on innovation, launching products and services for multiple industries. Google has been growing rapidly in the fast-growing highly-competitive cloud market.
This Zacks Rank #1 company has an expected earnings growth rate of 46.1% for the current year. The Zacks Consensus Estimate for the current year improved 23.1% over the last 7 days. The stock is currently trading at a discount of 5.1% from its 52-week high.
Lam Research Corp. LRCX reported third-quarter fiscal 2021 non-GAAP earnings of $7.49 per share, which surpassed the Zacks Consensus Estimate of $6.56. Also, the figure increased 24.2% sequentially. Adjusted revenues increased 11.3% sequentially and 53.7% year over year to $3.85 billion. The reported revenues also outpaced the Zacks Consensus Estimate by 4.01%.
Lam Research has high exposure to the memory segment, which is likely to see tremendous growth over the next few years. The strength is driven by cloud computing, big data, mobile devices and IoT. Technological advancements in the areas of multi-patterning, 3D device architecture and advanced packaging technologies are playing to Lam’s strengths.
This Zacks Rank #1 company has an expected earnings growth rate of 67.5% for the current year (ending June 2021). The Zacks Consensus Estimate for the current year improved 7.4% over the last 30 days. It has a current dividend yield of 0.84%. The stock is currently trading at 9.4% below its 52-week high.
Texas Instruments Inc. TXN reported first-quarter 2021 earnings of $1.87 per share, which surpassed the Zacks Consensus Estimate by 19.9%. The bottom line also surpassed management’s guidance of $1.44-$1.66 per share. Revenues of $4.3 billion, beat the Zacks Consensus Estimate of $3.9 billion. The top line comfortably surpassed management’s guidance of $3.79-$4.11 billion.
The company serves diverse end markets that balance individual ups and downs in multiple ways. It serves individuals and corporations (personal communications, calculators), industrial customers (a large number of customers across many markets and automotive manufacturers) and infrastructure providers (communications segment). The emergence of 5G technology is aiding the performance of its analog products in the communication equipment market.
This Zacks Rank #2 company has an expected earnings growth rate of 23.3% for the current year. The Zacks Consensus Estimate for the current year improved 8.7% over the last 7 days. It has a current dividend yield of 2.28%. The stock is currently trading at 10.4% below its 52-week high.
Advanced Micro Devices Inc. AMD reported first-quarter 2021 non-GAAP earnings of $0.52 per share, surpassing the Zacks Consensus Estimate by 18.18%. Notably, the bottom line soared 189% year over year but remained flat sequentially. Revenues of $3.445 billion outpaced the Zacks Consensus Estimate by 7.46% and surged 93% year over year. On a quarter-over-quarter basis, the top line increased 6%.
The company plans to expand its semi-custom chip business into high-growth markets such as the semi-custom ultra-low power client, embedded, dense server and professional graphics markets, offering differentiated products using its APU and graphics IP. Its Vega-based GPUs increasing demand for both gaming and blockchain industries are key catalysts.
This Zacks Rank #2 company has an expected earnings growth rate of 65.9% for the current year. The Zacks Consensus Estimate for the current year improved 9.7% over the last 7 days. The stock is currently trading at a discount of 20.8% from its 52-week high.
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