Time to Sell Tech?
Harvey S. from Youngstown, OH asks: Hi Mitch, with all the bad press about Facebook, and with Amazon looking like it could be in trouble too, would you say the outlook for technology companies is not looking so good at the moment? I know they’ve been leading the market for so long. I wonder if their time has run out.
Mitch’s Response: Thanks for writing, Harvey. The headwinds against technology companies have certainly been building over the last several weeks.
Last week was Facebook CEO Mark Zuckerberg’s testimony in Washington. Day 1 of his questioning felt more like a tech support call than a public trial, as lawmakers struggled to understand even the basics of Facebook’s business model. Day 2, however, was much more direct and tough, with lawmakers clearly more prepared and in-tune with the issues at heart.
As for Amazon, President Trump has had some harsh words on Twitter and has also indicated he intends to completely review the US Postal Service’s business model particularly as it pertains to pricing for bulk customers like Amazon. But the other, arguably more important story for Amazon hinges on the Supreme Court case that will decide how billions of dollars of goods sold each year by independent merchants on Amazon could be vulnerable to state sales taxes. The case, South Dakota v. Wayfair, could see a decision by the end of June, and it could influence how retailers decide to do business on Amazon’s platform.1
Take all of this together, and what we see is a fresh batch of regulatory pressure that could affect the revenue models of some of the biggest names in technology.
But before you go trimming your technology positions or selling them outright, there are a few reasons to think twice, in my view. The first is that even though the pressure is mounting, my view is that the road to regulation is much, much longer than many expect. Congress has tried to pass laws before on data privacy to no avail and based on Zuckerberg’s testimony and the questions asked of him, I’d say they are no closer today than they have ever been for broad-based regulation. Any proposals are likely to be met with considerable debate and gridlock. And the process could take months, or even years.
The second thing to consider is the earnings outlook for technology companies, which could trump any fears of regulation. For the Technology sector, total Q1 earnings are expected to be up +20.7% on +11.4% higher revenues, which materially outpaces the expected earnings growth for the S&P 5002 (+16.6%) on +7.5% higher revenues.3
On a full year basis, Technology is expected to see +17.3% earnings growth which marks an improvement over 2017’s +15.8% earnings growth. In spite of any threat of new regulation, the enterprise spending environment in tech is expected to improve this year even before the tax cuts, which only boosted expectations further. Also, keep in mind that the existing secular trends in cloud computing, A.I., and big data continue to be expected areas of big growth in the space.4
At the end of the day, I think tech regulation is important to watch closely but should not necessarily drive an investment thesis at this point. It’s too early to know what might come of lawmakers renewed interest in the tech sector. In the meantime, I’d follow the money, which shows the Technology sector overall continuing to perform well.5
And an additional step you can take is to focus on your financial situation, instead of getting too caught up in the headlines surrounding tech. While you probably can’t predict what will happen next with the market, you can try to prepare for what’s to come.
You may be wondering how you can determine your long-term goals, your risk tolerance, your investment time horizon and other factors that make up your financial situation. This can be a difficult process to navigate on your own. So, to help you get a head start, I would recommend referring to our guide, “4 Steps to Managing Your Retirement Assets.”
This guide offers insight to help you make critical decisions about your retirement and outlines four simple steps that can give you an added advantage as you plan for your future. Get your free copy today by clicking on the link below.6
2 The S&P 500 Index is a market-capitalization weighted index containing those S&P 500 companies that have higher book-to-price risk index factor exposures and, as a consequence, higher book-to-price ratios than the remaining companies in the S&P 500. Indices cannot be invested in directly.
3 Zacks Investment Research https://www.zacks.com/commentary/157978/why-is-the-market-unimpressed-with-bank-earnings?
4 Zacks Investment Research https://www.zacks.com/commentary/157978/why-is-the-market-unimpressed-with-bank-earnings?
5 Source – Zacks Investment Management’s Stock Market Outlook Report
6 ZIM may amend or rescind the Guide “4 Steps to Managing your Retirement Assets” for any reason and at ZIM’s discretion.
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