- Wednesday, October 16, 2024
While technology stocks have recently taken a hit, there is growing optimism surrounding their earnings forecasts. From market giants to smaller tech companies, the sector is becoming increasingly attractive.
The Technology Select Sector SPDR ETF (ticker: XLK) has experienced a slight decline of just over 9% since its peak in late July. The main reason behind this dip is the surge in long-dated bond yields. These higher yields decrease the present value of future profits, leading investors to be less willing to pay a premium for the expected earnings of fast-growing tech companies in the years ahead.
As a result, the valuations of tech companies have dropped. The fund is currently trading at around 24 times the anticipated aggregate earnings of its component companies for the upcoming year. This is a decrease from nearly 27 times in late July.
However, the business prospects for the technology sector have been improving. In the last three months, over 70% of analysts who cover tech companies in the S&P 500 have revised their profit forecasts upwards, according to Citi.
Optimism has been fueled by stronger-than-expected earnings from technology giants like Netflix (NFLX). In fact, all five tech companies in the S&P 500 that have reported their third-quarter earnings so far surpassed Wall Street's profit expectations. While aggregate sales were in line with estimates, earnings per share exceeded predictions by approximately 6%, as reported by Evercore.
This combination of outperforming profits and solid sales indicates that profit margins are surpassing initial forecasts—a positive development.
Wedbush analyst Dan Ives expressed confidence in the tech sector's future, stating in a recent research note that strong earnings reports are expected to act as a catalyst for further growth.
Stay tuned as more tech companies release their earnings reports, as they may provide further momentum for the sector's upward trajectory.
Analysts' Hopes Soar as Tech Companies Boost Expectations
While the market eagerly awaits earnings reports from tech giants like Microsoft (MSFT), Amazon.com (AMZN), and Meta Platforms (META), several tech companies have already surpassed analysts' expectations.
Salesforce is a shining example. FactSet reports that analysts have increased their estimates for Salesforce's 2024 EPS by over 4% in the last three months.
One key factor behind this impressive growth is Salesforce's effective utilization of artificial intelligence to enhance its products. According to an analysis by Morgan Stanley, customer surveys indicate that Salesforce has gained a few percentage points of market share in recent quarters. Analysts widely agree that while sales may not grow as quickly as they have in the past, Salesforce is poised to sustain low double-digit increases in the coming years, with revenue projected to reach $42.6 billion by 2025.
To achieve this growth, Salesforce remains unwaveringly disciplined in managing costs, demonstrating its ability to expand profit margins while pursuing expansion. Analysts predict that earnings per share will increase at a rate of just under 20% annually over the next two years.
Considering its current standing, with a 15% drop from its 2023 high in late July, Salesforce presents an enticing opportunity for investors.
This trend, along with other success stories, is making the entire tech sector more appealing to investors. It's a straightforward equation: investors can now enjoy high-profit growth potential at lower prices. FactSet data reveals that the S&P 500 tech fund is projected to achieve mid-single-digit sales growth annually for the next couple of years.
As profit margins continue to expand, earnings per share could witness an annual growth rate of approximately 15% over the same period. Despite these positive signs, tech stocks have experienced a recent decline in their share prices. Therefore, long-term investors should take a keen interest in the tech industry.
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