Finding Growth in Technology Investing
The technology sector has been on a tear, as reflected by the 19.31 percent gain of the Technology Select Sector SPDR Fund (NYSEARCA:XLK) thus far this year, which outpaced the 16.39 percent advance by the NASDAQ Composite (INDEXNASDAQ:.IXIC) and the S&P 500 (INDEXSP:.INX)’s 9.12 % rise. Looking at it from another perspective, the S&P 500 Information Technology (Sector) (INDEXSP:SP500-45), which peaked at 988.49 on March 27, 2000, ahead of the tech bubble burst, fell about 80 percent from the peak before it began to stage a recovery. The recovery took fairly long — a little over 17 years — to be termed as complete. The index successfully challenged the level and went past it on July 20, although it has been range bound around this level since then.
The FAANG Power
However, the quality of the rally isn’t anything to write home about, as it has come about due to gains in a handful of heavily weighted stocks. Those stocks that have led the tech sector rally are Facebook Inc (NASDAQ:FB), Apple Inc. (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX) and Alphabet Inc (NASDAQ:GOOGL)(NASDAQ:GOOG), commonly referred to by the acronym ‘FAANGs.’ The combined market capitalization of these five stocks was $2.47 trillion as of August 25, 2017, accounting for roughly 14 percent of real annual U.S. GDP for 2016.“The FAANG stocks now account for 11.9% of the S&P 500’s market capitalization, up from 5.8% on April 26, 2013,” the Marketwatch said in June, quoting Ed Yarden.
Value Vs. Growth Investing
Stock selection depends on investors’ return goals, risk tolerance, investment philosophy, the timeframe etc. Depending on the importance investors accord for the time frame, investment can be value or growth oriented. The investing strategy that focuses on the present, wanting to buy stocks, which are currently undervalued, is called value investing. Alternatively, investing in stocks that have huge future growth potential is called growth investing. As the tech sector still holds promise, here’s a list of tech stocks you could still consider as an investment option to fetch you decent returns in the near to medium term. Since tech stocks promise huge future growth potential, the screening techniques for growth investing was used.
Stock Screening Criteria
The stocks chosen for the purpose of the article are based on the following criteria:
- Earnings per share growth – past (five-year) – More Than 0 percent
- Earnings per share growth future (one-year) – Over 10 percent
- Earnings per share growth future (five-year) – Over 10 percent
- Net profit margin (> 20 percent)
- Return on Investment, or RoI (shareholder returns) (>15 percent)
- Stocks trading above their 200-day Simple Moving Average
1. Weibo Corp (ADR) (NASDAQ:WB)
Weibo, the Chinese equivalent of Twitter Inc (NYSE:TWTR), is owned by Chinese online portal SINA Corp (NASDAQ:SINA). Founded in 2009, it was spun off into a separately traded public company in 2014. Weibo lets users create and post content, play games and watch news and weather. Business Model:- The company makes money by selling ads, just like any other social media platform. As of June 2017, monthly active users, or MAUs, numbered 361 million, up 28 percent year-over-year. About 92 percent of MAUs were mobile users. Average daily active users, or DAUs, totaled 159 million, 26 percent growth. The company turned profitable in 2015. Weibo’s stock is now trading off its all time closing high of $98.21 reached on August 24
Average Annual Revenue Growth (since 2013) – 85.83 percent Net profit margin – 23.20 percent ROI – 18.10 percent
CMP – $95.08 One-year Gain – 97.35 percent Average Analysts Recommendation – Buy Average Price Target – $95.71
2. IPG Photonics Corporation (NASDAQ:IPGP)
The company manufactures fiber lasers and fiber amplifiers used in several applications, such as materials processing, communications, medical and advanced applications. The company’s disruptive laser weaned manufactures away from traditional lasers to fiber lasers, touting its low cost, less power consumption and smaller overall footprint.
Average Annual Revenue Growth (5-year) – 16.33 percent Net profit margin – 26.90 percent ROI – 16.20 percent
CMP – $169.77 One-year Gain – 95.13 percent Average Analysts Recommendation – Buy Average Price Target – $182
3. Simulations Plus, Inc. (NASDAQ:SLP)
Simulations Plus develops absorption, distribution, metabolism, excretion, and toxicity modeling and simulation software for the pharma and biotech, industrial chemicals, cosmetics, food ingredients, and herbicide industries.
Average Annual Revenue Growth (5-year) – 19.47 percent Net profit margin – 24.90 percent ROI – 21.80 percent
CMP – $14.25 One-year Gain – 73.99 percent Average Analysts Recommendation – Strong Buy Average Price Target – $17.35
4. Electronic Arts Inc. (NASDAQ:EA)
This video game software maker has been benefiting from the secular shift to digital distribution happening in the industry. After posting negative top line growth in 2013 and 2014, the company’s fortunes turned around nicely in 2015, when its revenues soared 26.29 percent. EA shares are also trading shy off its closing high of $119.25 hit on August 16. Credit Suisse analyst Stephen Ju said in a recent report, “EA benefited from not only consumers foregoing buying physical games in favor of downloading but also from micro-transactions from live services.” “For instance, “FIFA Ultimate Team” transactions grew by 30 percent on a year-over-year basis.” In fact, the shift to digital and consumer adoption of microtransactions are two of the key components of the analyst’s long-term bullish stance. Another supporting factor is the expansion of EA’s addressable market to better address the vast global market of online users.
Average Annual Revenue Growth (5-year) – 7.58 percent Net profit margin – 23.30 percent ROI – 19.40 percent
CMP – $118.73 One-year Gain – 46.25 percent Average Analysts Recommendation – Buy Average Price Target – $124.77
5. Facebook Inc (NASDAQ:FB)
This social media behemoth needs no mention, which is just about trying all tricks to cement its dominant position, with the company not shying away from even rolling out copycat versions of some of smaller rival Snap Inc (NYSE:SNAP)‘s successful features. WhatApps, Instagram and Messenger are all promising monetizing opportunity before the company. The company continues to perform excellently, thanks to strong growth in monthly and daily active users, which is fueling strong gains in advertising revenues.
Average Annual Revenue Growth (5-year) – 49.63 percent Net profit margin – 40.90 percent ROI – 17.10 percent
CMP – $167.24 One-year Gain – 33.80 percent Average Analysts Recommendation – Buy Average Price Target – $192.62
6. Applied Materials, Inc. (NASDAQ:AMAT)
This half-century old chip equipment maker is riding the crest of the semiconductor boom, set in motion by new-age technologies such as AI, IoT, Cloud computing etc.
Average Annual Revenue Growth (5-year) – 1.67 percent (dragged by negative revenue growth in 2012 and 2013; Taking the past three years, average revenue growth was 13.12 percent Net profit margin – 40.90 percent ROI – 17.30 percent
CMP – $43.63 One-year Gain – 45.58 percent Average Analysts Recommendation – Buy Average Price Target – $55.27
7. Skyworks Solutions Inc (NASDAQ:SWKS)
Skyworks is a maker of high-performance analog and mixed signal semiconductors that facilitate mobile connectivity. Its power amplifiers, front-end modules, and direct conversion radios form the core of edge multi media handsets. The company is heavily exposed to Apple Inc. skywork (NASDAQ:AAPL), with the tech giant accounting for 40 percent of Skyworks’ revenues in 2016. To eliminate risk, the company is now slowly diversifying away from Apple, with Chinese companies such as Huawei now doing business with it. Skyworks stock hit a record closing high of $110.66 on June 8.
Average Annual Revenue Growth (5-year) – 19.16 percent Net profit margin – 27.90 percent ROI – 25.80 percent
CMP – $100.70 One-year Gain – 34.54 percent Average Analysts Recommendation – Buy Average Price Target – $112.50 Note: Average analyst recommendation and price target were sourced from Yahoo Finance