Though technology was the biggest laggard in the last earnings season, the sector is looking to turn it around this time. Total earnings for the technology stocks that have reported results so far are up 10.8% with a beat ratio of 70.3%, while revenues for these companies are up 3.5% with a revenue beat ratio of 59.5%.
Strong performances from some of the major companies like Google (GOOG), Microsoft (MSFT), Intel Corp. (INTC), Sandisk (SNDK) and Micron (MU) have helped to reverse the negative earnings in the past few quarters (read: Top Ranked Tech ETF for Q3 Earnings Season).
This is further supported by the earnings release after the bell from the technology giant Apple (AAPL), which came out with solid numbers for the fiscal fourth quarter but disappointed on the outlook front.
Apple Results in Focus
The company surpassed our estimates on both earnings and revenues thanks to strong iPhone sales. Apple sold 33.8 million iPhones in the quarter, up 26% year over year.
Though earnings per share fell 5% to $8.26 for the third consecutive quarter, it strongly outpaced the Zacks Consensus Estimate of $7.89. Revenues rose 4% year-over-year to $37.5 billion, beating our estimate of $36.74 billion.
Apple expects revenues in the range of $55–$58 billion for the current quarter; the midpoint is higher than the Zacks Consensus Estimate of $56.02 billion and the Wall Street expectation of $55.5 billion. Further, the stock has a Zacks Rank #2 (Buy), suggesting that the bullish trend can definitely continue in the near future.
Gross Margin: A Big Concern
Despite the beat on both top and bottom lines, the ubiquitous gadget-maker sees lower gross margin of 37% compared to 40% in the year-ago quarter. This is mainly due to the lower pricing of iPhones and iPads, which face intense competition from Samsung and Amazon (AMZN) (read: Internet ETFs in Focus on Amazon Sales Beat).
Apple provided a weak gross margin outlook for the ongoing quarter, which includes the crucial holiday shopping season, raising concerns on profit margins. The company predicts a gross profit margin of 36.5–37.5% for the current quarter, which is well below the 38.6% reported in same period last year and the 38% analyst expectation.
There has been mixed reactions in the market to Apple earnings release. Apple shares initially fell 5% in after hour trading on declining margin concerns but have recovered following the upbeat revenue forecast. AAPL shares fell roughly 1% in extended trade after the close on Monday.
ETFs to Watch
Many technology-focused ETFs have seen huge gains over the past three months as Apple’s share price enjoyed a huge rally of more than 25%. These ETFs have a heavy exposure to the industry giant and their returns are arguably directly related to the rise and fall of Apple.
Below, we have highlighted three such ETFs that look to be in focus in the coming days. Investors should closely monitor the movement in these funds and could catch the opportunity from any surge in the price (see: all the Technology ETFs here):
iShares Dow Jones US Technology ETF (IYW)
This ETF tracks the Dow Jones US Technology Index, giving investors exposure to the broad technology space. The fund holds 143 stocks in its basket with AUM of $2.8 billion while charging 45 bps in fees and expense. Volume is moderate as it sees nearly 310,000 shares move hands in a day.
Apple occupies the top position in the basket with 17.35% of assets. The product is heavily skewed toward the technology hardware and equipment segments, as these make up for more than half of the portfolio. Software and computer services take the remaining portion in the basket.
The fund added over 7% over the past three months and 17% in the year-to-date time frame. The product has a Zacks ETF Rank of 2 or ‘Buy’ with a ‘High’ risk outlook (read: Buy This Top Ranked Tech ETF Now).
Select Sector SPDR Technology ETF (XLK)
The most popular technology ETF on the market, XLK follows the Technology Select Sector Index. This fund manages about $12.7 billion in asset base and trades in heavy volume of roughly 7.6 million shares a day. The ETF charges 18 bps in fees per year from investors.
In total, the fund holds about 75 securities in its basket. Of these firms, AAPL takes the first spot, making up roughly 14.93% of the assets. In terms of industrial exposure, the fund is widely spread across computer & peripherals, IT services, software, Internet software & services and diversified telecom services that make up for double-digit allocation.
The fund returned nearly 6.4% over the past three months and is up about 18% year-to-date. XLK currently has a Zacks ETF Rank of 3 or ‘Hold’ with a ‘Medium’ risk outlook.
Vanguard Information Technology ETF (VGT)
This fund manages nearly $4 billion in asset base and provides exposure to a large basket of 414 technology stocks by tracking the MSCI US Investable Market Information Technology 25/50 Index. The ETF has 0.14% in expense ratio while volume is moderate.
Again here, AAPL is the top firm with a 13.3% allocation while others hold less than 8% of assets. This suggests that the performance of the fund is highly dependent on Apple’s performance. From a sector perspective, Internet software & services and computer hardware take the largest share with 16% each (read: 3 Internet ETFs Leading the Tech World Higher).
VGT gained nearly 21% year-to-date and 8% in the past three months. The fund has a Zacks ETF Rank of 1 or ‘Strong Buy’ with a ‘Low’ risk outlook, and could thus be a solid pick for investors seeking to play the tech sector this year.
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