Not even the coronavirus can stop tech.
The market as a whole might be coming under pressure, but don’t let that cloud the fact that some of tech’s biggest leaders have been giving absolutely astounding earnings reports.
The latest earnings reports are showing us how the cloud services industry has given Silicon Valley firms a path to profit margins and cash flow that used to be impossible.
And as for semiconductors, we just can’t have a modern economy without them.
Outside news like the coronavirus might still cause some instability in the short term, but in the long term, the outlook is good.
As that pressure keeps up, we will be able to buy great stocks for great prices. Let’s take a closer look at some of the opportunities here…
Unstoppable Tech
The earnings numbers coming out of the tech sector have been great.
They’re in stark contrast to a lot of the warnings that came out back in November and December of last year, saying that tech wasn’t going to have the kind of earnings that we’re seeing now.
One of the big earnings reports was, of course, Amazon.com Inc.’s (NASDAQ: AMZN) last Wednesday, which blew expectations out of the water. In fact, earnings helped Amazon rise almost 9% when the rest of the Nasdaq fell 1.6% last Friday.
One of the analysts who covers the company even went so far as to call it a “masterpiece earnings report.”
Apple Inc. (NASDAQ: AAPL) is another company that blew past expectations. Again, in contrast to what everybody expected near the end of last year, saying that it was going to be a bad quarter for Apple and iPhone sales, it actually turned out to be a really great quarter for the company.
The results of these industry giants are important for the overall market because people were afraid tech was going to pull stocks down earlier this year. Instead, we’re seeing the reverse happening.
The impact of the coronavirus on the market is something that we can’t really control, but tech is definitely maintaining its leadership.
Another company I’m looking at is ServiceNow Inc. (NYSE: NOW), which provides cloud-based software for workflow automation and has a $64 billion market cap.
Its earnings have been fantastic, beating both forecasts for sales and earnings in Q4.
In fact, it’s the first year the firm has reported earnings under the command of new CEO Bill McDermott, who has led a recent resurgence in the stock.
It’s important to note here that this is the power of the cloud. It’s a new phase in technology.
I know I’ve been talking about the cloud for a long time, but what we’re seeing now is three companies I’m talking about today – Amazon, ServiceNow, and Microsoft Inc. (NASDAQ: MSFT) – all become these big cloud players.
And their margins are amazing because of the fact that you have this constant, recurring revenue.
In the old days, Silicon Valley didn’t have this kind of recurring revenue stream. It’s almost like having the license to print money when you have this massive cash flow.
If you look at a lot of these tech leaders, you’ll see that they throw off a lot of levered free cash flow, which shows that they’re extremely efficient.
For example, if we look at Microsoft, its gross profits just this quarter were 66% – simply put, that’s an amazing number.
You Can’t Have Tech Without This
I love semiconductors. Because you just can’t have the kind of high-tech economy we have today without chips.
They’re everywhere. And you’ve also got the Internet of Things, self-driving cars – every piece of electronics today has at least a chip or sensor in there.
There are leaders and laggards in the group, but the group itself is essential for the U.S. economy and for all things technology.
There are obviously going to be winners and losers, but Intel Corp. (NASDAQ: INTC) had a breakout quarter, which was good to see. It’s been lagging a little bit lately. It lost the race to the smallest nanometer chips available, which came from Advanced Micro Devices Inc. (NASDAQ: AMD).
One of the things I like about AMD in particular is that it’s become more of a design house, and it doesn’t have the kind of overhead that Intel has by making its own chips.
Silicon Valley just isn’t like it used to be, when it was very boom and bust. The financial planning and engineering that has been going into these developments has been great – which is huge for tech investors.
The markets are certainly in a tough spot right now, but I am ready to use what happens to buy some of these tech stocks that have been on my radar screen for a while.
So my strategy for right now is using one of my favorite tactics, a Cowboy Split. That’s when you make “split entries” when you acquire shares of a great tech stock.
With this process, we buy a one-half or one-third entry at market and then put in a lowball limit order to pick up the rest, should the market or the stock itself retreat.
My plan is to put in some entries now, and if the market goes down 20%, I’ll buy more later.
— Michael A. Robinson
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Source: Money Morning