Mitch on the Markets

August 5th, 2019

Tech Stocks: Separating Hype from Performance

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Earnings season is in full swing, which gives investors an opportunity to ditch the news cycle for a moment to focus on revenues, cash flows, and profits. Or, as I would argue, the factors that matter most to equity investors long-term.

This week I want to focus on technology stocks. We’ve seen several IPOs in 2019 that have made big splashes and garnered a lot of exciting media coverage. But a closer look reveals that for all the hype and rapid gains, many of these companies are yet to turn a profit. Uber, for example, in its first quarterly earnings filing in Q1 posted losses of $1 billion on revenue of $3.1 billion. The company is growing at rapid pace, but losing $1 billion in three months is steep.1

These figures are a far cry from recent earnings reported by tech behemoths like Amazon and Google. Profit in the second quarter for Amazon was $2.63 billion (yes, billion), which is more than double the profit it made in the first quarter. Alphabet’s (Google) numbers are even more staggering, with a reported $9.2 billion second quarter profit on $38.9 billion in revenue – a 19% increase from the same quarter last year.2

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Focus on the Fundamentals Instead of the Headlines!

When looking at the unknowns of tech, are you wondering where, how, and when to invest? Instead of focusing on the news flow, I recommend focusing on cash flow and other key economic indicators. To help you do this, we are offering all readers a first-look into our just-released Stock Market Outlook report.

This report will provide you with our forecasts along with additional factors to consider:

If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!

IT’S FREE. Download the Just-Released Stock Market Outlook3

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This example of Uber vs. Amazon and Google is, in my view, a cross-section of what it means to invest in the technology sector today. Investors must assess the value of investing in established technology companies like Intel and Microsoft – which often deliver reliable earnings with steady dividend payments – against up-and-coming players in technology that tend to be headline grabbing, ‘disruptive,’ and characterized by exponential growth, potentially high returns, and negative earnings.4

The question is, where and how to allocate?

Focus on Cash Flows and Future Cash Flows

In my view, the winners in the technology space will be the corporations that can improve their return on equity (ROE) while consistently growing revenues and margins. In other words, we need to see how companies can grow earnings consistently and create new sources of cash flow in the future. Microsoft and Amazon’s burgeoning cloud businesses are a great example, in my view, of how a technology company can step into a new business line for new sources of cash flow.

For investors looking ahead 10, 20, even 50 years, you’ll want to assess how well-positioned a company is to either create or apply advancements in technology like 5G connectivity, robotics, Artificial Intelligence, and machine learning to enhance productivity, expand manufacturing capabilities, and ultimately sell and do more at a lower cost. The cash flow generation potential of these applications is virtually unlimited given their asset-light business models, near-immediate global penetration, and the vast array of essential and life-altering services they provide to global consumers. 

Taking the long-term view – and given the many unknowns that come with future technologies – may give the impression that an investor needs to make a calculated bet for where, how, and when to invest. But I don’t think it has to be that complicated. In my view, if an investor follows the cash flow versus the news flow it will become clearer which companies have competitive advantages and sustainable business models. Getting this right takes great scrutiny and analysis from a bottom-up standpoint, something we strive to do here every day at Zacks Investment Management.

Bottom Line for Investors

It’s been a major theme for much of the current bull market: the biggest technology companies have been outperforming during rallies, pulling the broad index higher. 2019 is no exception. Through last Friday, Microsoft, Apple, Amazon, and Facebook have delivered combined performance that accounts for 19% of the S&P 500’s total return for 2019 (note: all of these companies are very profitable).5

Emerging technologies stand to fuel growth and cash flow for decades and generations to come. For investors, having broad, diversified exposure to equities in tech and elsewhere means giving yourself the ability to participate in that growth as it likely unfolds.

In my view, it is essential to be attentive to the changing tech landscape. This means keeping a close eye on revenues, cash flows, profits and other key economic indicators. To help you do this, we are offering all readers a first-look into our just-released Stock Market Outlook report.

This report will provide you with our forecasts along with additional factors to consider:

If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!6

Disclosure

1 Techcrunch May 30, 2019. https://techcrunch.com/2019/05/30/uber-earnings/

2 The Wall Street Journal, June 25, 2019. https://www.wsj.com/articles/google-posts-strong-earnings-as-threats-mount-11564086496?mod=djem10point

3 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.

4 BlackRock, June 4, 2019. https://www.blackrockblog.com/2019/06/04/technology-future-cash-flows/

5 The Wall Street Journal, July 21, 2019. https://www.wsj.com/articles/tech-rally-powers-record-gains-for-stocks-11563701401

6 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.

DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

It is not possible to invest directly in an index. Investors pursuing a strategy similar to an index may experience higher or lower returns, which will be reduced by fees and expenses.
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