A Look At Tech's Big Rally

What's driving the rally in technology stocks? The answer is more than just "exceptionally strong" fundamentals, according to Jefferies managing director Brent Thill.

What Happened

Technology stocks are strong for a plethora of reasons, Thill said during CNBC's "Squawk Alley" segment Tuesday morning. Multiple technology stocks under Jefferies' coverage are showing growth rates in the 20-30-percent range, which helped "pick up the slack" seen in weaker industries, the analyst said. 

Valuation metrics for big tech names like Facebook, Inc. FB and Alphabet Inc GOOG GOOGL are still attractive at around 12x EBITDA, Thill said. This multiple represents a discount to peers, which implies there is still room for at least 10-percent upside, he said — if not up to 20 percent for large names.

The technology sector is seeing a boost from a string of recent mergers and acquisitions, Thill said. Most recently, Microsoft Corporation MSFT bought GitHub for $7.5 billion and salesforce.com, inc. CRM acquired MuleSoft, which was announced in March and closed in early May.

Encouragingly, both of these transactions occurred at "multiples we haven't seen for many years," Thill said. 

Why It's Important

The tech rally makes one thing clear: the "big are going to get stronger," and the long-term roadmap for large-cap names remains "fantastic," Thill said.

The story is "more mixed" for small-cap and mid-cap stocks, where only two names stand out, Thill said.

IAC/InterActiveCorp IAC is a way for investors to gain exposure to "emerging internet trends" like online dating, he said. Godaddy Inc GDDY has been "super consistent" in supporting small businesses in growing their internet presence, the analyst said. 

What's Next

The widely tracked Technology Select Sector SPDR Fund XLK ETF hit a new all-time high at $72.04 on Tuesday. Multiple technology names also hit new all-time highs on Tuesday, but it's yet to be seen if the group will finish the session in the green. 

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