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Is it too late for technology stocks and ETFs? Our quick answer from a quantitative perspective is no.  Of the 15 Sectors covered in reports by ValuEngine, Technology ranks fourth in expected 12-month price return according to our forecast model.  Our sector ratings are equally weighted indicating that this broad sector has strongly rated stocks throughout the market cap spectrum and beyond the “Magnificent Seven.”  In fact, 570 of the roughly 4,000 US-listed stocks covered by ValuEngine are in the Technology Sector.  Of these, roughly 32% or 180 stocks are currently rated 4 (Buy) or 5 (Strong buy).  However, 110 of these stocks have less than $20 million in market capitalization and would fail many institutional investors’ liquidity and/or fiduciary screens.  Thus, we narrowed this week’s analysis to the 70 stocks that pass this screen.

While all 70 of these stocks are forecast to post significantly higher price returns than the median stock we rate according to our predictive model, they are not necessarily favored by ValuEngine’s valuation model. In fact, 63 of the 70 are rated as overvalued.  This leaves 7 Technology Stocks with more than $20 million in market cap that are currently selling below what we calculate as Fair Value.  All of those happen to be rated 5 (Strong Buy) as well.

Here is the list of the tech stocks that passed all of these screens:

They are:
Zoom Communications (ZM) - Zoom Communications Inc. provides an Artificial Intelligence-first work platform for human connection in the Americas, the Asia Pacific, Europe, the Middle East, and Africa. The company offers Zoom Meetings that offers HD video, voice, chat, and content sharing through mobile devices, desktops, laptops, telephones, and conference room systems; Zoom Phone, a cloud phone system; and Zoom Team Chat enables users to share messages, images, files, and content in desktop, laptop, tablet, and mobile devices.  The company was incorporated in 2011 and is headquartered in San Jose, California.

Infineon Technologies AG (IFNNY) - Infineon Technologies AG engages in the design, development, manufacture, and marketing of semiconductors and semiconductor-based solutions worldwide.  Segments include: Automotive; Industrial Power & Sensor; and Connected Secure Systems.  The company was incorporated in 1999 and is headquartered in Neubiberg, Germany.

Block Inc.(XYZ) - builds ecosystems focused on commerce and financial products and services in the United States and internationally. It operates through two segments: Square and Cash App. The company was formerly known as Square, Inc. and changed its name to Block, Inc. in December 2021. Block, Inc. was incorporated in 2009 and is based in Oakland, California.

Twilio Inc. (TWLO) - offers customer engagement platform solutions in the United States and internationally. The company provides various application programming interfaces and software solutions for communications between customers and end users, including messaging, voice, email, flex, marketing campaigns, and user authentication and identity. . Twilio Inc. was incorporated in 2008 and is headquartered in San Francisco, California

HubSpot (HUBS) - provides a cloud-based customer relationship management (CRM) platform for businesses in the Americas, Europe, and the Asia Pacific. The company's CRM platform includes Marketing Hub, Sales Hub, Service Hub, and Content and Operations Hub. The company was incorporated in 2005 and is headquartered in Cambridge, Massachusetts.

Marvell Technology, Inc. (MRVL) - provides data infrastructure semiconductor solutions, spanning the data center core to network edge. The company develops system-on-a-chip architectures, integrating analog, mixed-signal, and digital signal processing functionality. It offers a portfolio of ethernet solutions, including spanning controllers, network adapters, physical transceivers, and switches; single or multiple core processors; and custom application specific integrated circuits. It operates in the United States, Argentina, China, India, Israel, Japan, Singapore, South Korea, Taiwan, and Vietnam. Marvell Technology, Inc. was incorporated in 1995 and is headquartered in Wilmington, Delaware.

ServiceNow, Inc.(NOW)  - provides cloud-based solution for digital workflows in the North America, Europe, the Middle East and Africa, Asia Pacific, and internationally. The company operates the Now platform, an AI platform for digital transformation machine learning, robotic process automation, process mining, analytics, and low-code/no-code development tools.  ServiceNow, Inc. was founded in 2004 and is headquartered in Santa Clara, California.

All seven stocks of the above companies are rated 5 (Strong Buy) and are priced below what we calculate as “Fair Value.”  We determine Fair Value by multiplying the current price by (1 +/- the percentage by which the stock is undervalued over overvalued).  According to this formula, ZM is nearly 100% undervalued.  The undervaluation levels calculated for IFNNY, XYZ, TWLO, and HUBS are also quite large  MRVL and NOW are just a bit undervalued and could be thought as constituting opportunities for growth at a reasonable price, sometimes referred to by the acronym GARP. 

As detailed in the above descriptions, only the German semiconductor company Infineon is not headquartered in the USA.  Other 5-rated Strong Buy companies headquartered outside the US include Chinese internet services company KE Holdings (BEKE) and Canadian internet services company Shopify (SHOP). Several wireless companies are also highly rated.  T-Mobile (TMUS) is rated 5 while the American Depository Receipts (ADRs) of Swedish giant Ericsson (ERIC) and Finnish giant Nokia (NOK) are rated 4.  US stalwart AT & T (T) is also rated at 4 but is far more overvalued according to our models.

As far as “The Magnificent Seven” are concerned, most of them are rated 4 or 5 as well.  Nvidia (NVDA) and Meta Platforms (META) are highest rated at 5.  Google (GOOGL), Amazon (AMZN), Microsoft (MSFT)  and Tesla (TSLA) are rated at 4.  Only Apple (AAPL) is  rated 3 (Hold).  Another tech stock with a market capitalization over 1 Billion, Broadcom (AVGO), sometimes called the 8^th member of the Magnificent Seven, gets a Buy rating of 4.  An ADR of a non-US-listed stock with over a trillion dollars in market cap and very much part of this conversation, Taiwan Semiconductor (TSM) is also rated 4.  Interestingly, as a result of recent market movements, Tesla (TSLA) has fallen below the trillion market cap mark at $974 billion.

Turning to Technology ETFs we turn to the nomenclature system and data from ETFdb.com, a TMX VettaFi company, along with its data, to set the table for us.  There are 175 ETFs classified as Technology. Of those, 41 are leveraged and/or inverse and excluded from this analysis.  Of the remaining 134, 89 are indexed and 45 are active. 
 

This table highlights the top 20 tech ETFs in descending order by Assets Under Management.

Analysis:

1. The largest, most-traded and best known ETF in this group is QQQ with the formal name Invesco QQQ Trust Series I.  The trust uses modified market-cap weighting to hold the stocks in the Nasdaq-100 index.  The latter is an index of the 100 largest non-financial and non-utility companies listed on the Nasdaq exchange.  As such, it is not a pure technology index. Non-tech holdings include Costco Wholesale (COST), PepsiCo (PEP) and Amgen (AMGN).   It also does not include technology stocks such as IBM with primary listings on the NYSE.  However, it is close enough that it has become the go-to Technology ETF for most investors and the vast majority of traders. That said, and as we’ve repeated a number of times in the past.’  When buying new shares of QQQ, first consider QQQM, the Nasdaq-100 ETF.  It holds exactly the same portfolio at a fee of 0.15% which is 5 basis points lower than the 0.20% expense ratio of QQQ, saving investors 0.05% in annual returns.  In either form, QQQ or QQQM, the ETFs are both rated 4 (Buy) by ValuEngine. 

2. The next two in line are VGT, The Vanguard Technology ETF and XLK, the Technology select Sector SPDR from State Street Global Advisors.  Both are pure plays in the US technology sector, and both charge the same economical expense ratio of 0.09%.  Like all the Select Sector SPDR ETFs, XLK applies modified market cap weighting to all the stocks in a given sector of the S&P 500, in this case 70 stocks.  Most other sectors are not as broad.  That said, investors looking for broader exposure may feel they are getting more for the same expense ratio with VGT which holds 321 US technology stocks and includes midcap and some small-cap stocks in addition to the large cap stocks that dominate the ETF’s weighting.  Fifth-ranked IYW, iShares US Technology Index ETF has only 25% of the assets of VGT despite starting five years earlier and for good reason.  IYW offers less-broad exposure but charges about four times the expense ratio.  The final broad technology US Sector fund actually has the lowest expense ratio, 0.08%.  It is FTEC, the Fidelity MSCI Information technology ETF and holds a very similar portfolio to VGT.  Thus far, the one-basis-point differential has not been enough to entice most institutional holders of VGT to switch to FTEC.  At any rate, the best returns in this category year-to-date and annualized over 5 years has gone to XLK, the narrowest ETF in this group.  All four of these US-Tech-industry-exposure ETFs are rated 3  (Hold) by ValuEngine.

3. All the other ETFs in this grouping are either more targeted, use different weighting schemes or hold some or all non-US stocks.  The top performer year-to-date in this group is ARKK, the ARK Innovation ETF with better than 35%.  Although no longer the US AUM leader among all active ETFs, ARKK certainly is the top AUM actively managed ETF within the Technology Sector.  However, on a 5-year annualized basis, ARKK has the second lowest annualized return, -0.6%, in the group.  After a magnificent beginning performance-wise which served to legitimize actively managed ETFs as an alternative to the popular indexed ETFs and to the less efficiently structured traditional mutual funds, ARKK’s returns began to suffer late last decade.  The fund now has a feast-or-famine reputation in terms of potential to realize superior returns, which is fair given that markets are cyclical.   Historically, the top outperforming actively managed funds tend to flip when market cycles change.  ARKK’s AUM of $7.2 billion may be significantly down from its all-time peak but certainly is #1 among the 45 actively managed funds serving this sector.

4. Next on the list of  year-to-date price gainers is KWEB, KraneShares CSI China Internet ETF.  It is the only non-US single-country focuses ETF in the top twenty and demand for new shares has been rising this year in tandem with its price.  It is #10 overall on the chart in Assets Under Management.  However, there is also considerable currency exposure.  In the five-year period, its annualized return is -9%, almost entirely because the renminbi had declined versus the dollar through most of this period before rebounding sharply this year. 

5. The final ETF with a return above 20% is SMH, the Van Eck Semiconductor ETF.  It is also a very impressive fourth in AUM.  With a close to 30% annualized five-year return, it is the leader in that category by a wide margin.  Although most of this can be attributed to the fact that semiconductors have outperformed most other technology industries and sub-sectors, SMH  has significantly out performed and garnered more assets then the other semiconductor ETF,  SOXX from iShares.

6. Other subsectors and specific industries within tech covered by ETFs in the group include: software, internet commerce, cybersecurity, artificial intelligence, cloud computing and pioneering technologies.    Two are globally rather than US-focused.  Finally, two of these ETFs, RSPT and QTEC, are variations or subsets of QQQ. 

7. Although several Technology subsector ETFs are rated 5 (Strong Buy) from ValuEngine, only one is in the top 20 in Assets Under Management.  That ETF is FDN, the  First Trust Dow Jones Internet Index Fund.  Smaller ETFs, as ranked by AUM, that are currently ranked  5 (Strong Buy) include: BUYZ, Franklin Disruptive Commerce ETF; NBDS, Neuberger Berman Disrupters ETF and SEMI, Columbia Select Technology ETF.

8. Only two of the ETFs offer dividend yields higher than 1%, KWEB and TDIV.  This is expected since the technology sector is known as a growth sector, providing relatively few value or income opportunities.

In summary, while many strategists are advising people that the high valuations in technology stocks and ETFs augurs that its time to dump this group and rotate into value stocks, our forecast model disagrees seeing the above average growth supported sufficiently by above average earnings-related streams and strong contributory factors.  On the other hand, a preponderance of overvalued stocks according to our valuation model also means that above-average upside opportunities are accompanied by significantly above-average risks. 

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