The technology sector was the biggest drag last quarter with most top players showing lackluster results. The sector’s downtrend seems to have spilled over to the third quarter, with modest improvements seen thus far not yet enough to set a bullish mood for the space.
Total earnings for the sector are expected to be down 1.2% in Q3 compared to a 9.6% earnings decline in Q2. Moreover, revenue growth will likely double form the prior quarter. This is evident from the latest Intel Corp. (INTC) release, wherein both the top and the bottom line beat our estimates (read: Semiconductor ETFs in Focus on Intel Earnings Beat).
However, the missing streak continues for International Business Machines (IBM), the largest computer-services provider. The company has missed revenue estimates for six consecutive quarters. This has resulted in a huge sell-off in IBM shares in after-hours trading yesterday, suggesting that more pain could be in store for this company in the near term.
IBM Results in Focus
The company suffered a big revenue miss by nearly $1 billion in Q3 due to sluggish demand for computer hardware and weak sales in emerging markets, in particular China. Revenue dropped 4% year over year to $23.7 billion. China’s economic reform plans and broader execution problems have led to a 40% year-over-year decline in hardware sales in the region.
IBM nevertheless reported better-than-expected earnings of $3.99 per share, beating the Zacks Consensus Estimate by 3 cents (read: 3 Tech ETFs Crushed as Washington D.C. Crisis Drags On).
The continued disappointing top line no doubt increased worries about the company’s revenue growth story, leaving investors feeling a little bearish about this stock for at least in the near term. IBM shares fell more than 6% in after hours Wednesday trading on heavy volumes.
However, the long-term prospect of the company does not look bad given continued growth in cloud computing and software segments. Further, growth in emerging markets will likely return to mid single digits next year after the implementation of China's new economic plans.
Currently, IBM has a Zacks Rank #3 (Hold). Moreover, we have a Neutral recommendation on the stock for the long term, suggesting some room for the upside.
ETFs to Watch
The results of IBM and its big revenue miss could have a huge impact on tech ETFs that are heavily invested in this large company. Below, we have highlighted three technology ETFs with the highest allocation to IBM that could be in focus in the days ahead.
Investors should closely monitor the movement in these funds and could catch the opportunity from any surge in the IBM price, or avoid them if IBM looks to drag them down to close the year (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 $2.6 billion while charging 46 bps in fees and expenses. Volume is moderate as it exchanges more than 300,000 shares in hand a day.
Of the major holdings, IBM takes the fourth position in the portfolio, making up 7.11% of asset. The product is heavily skewed toward the technology hardware and equipment segments, as these make up for more than half of the portfolio. Software & computer services take the remaining portion in the basket.
The fund is up 14.70% in the year-to-date time frame. The product has a Zacks ETF Rank of 3 or ‘Hold’ with a ‘High’ risk outlook.
First Trust NASDAQ Technology Dividend Index Fund (TDIV)
This fund provides exposure to the dividend payers within the technology sector by tracking the Nasdaq Technology Dividend Index. The product has amassed about $215.1 million in its asset base while trades in volume of roughly 92,000 shares per day. The ETF charges 50 bps in annual fees (read: No Taper? No Problem for These Dividend ETFs).
In total, the fund holds about 87 securities in its basket. Of these firms, IBM takes the fourth spot, making up roughly 7.75% of the assets. In terms of industrial exposure, the fund allocates one-fourth portion in semiconductor and semiconductor equipment, followed by software (14.68), and computer and peripherals (14.22%).
The fund has returned over 22% so far this year.
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 billion in asset base and provides exposure to a small basket of 75 securities. The ETF charges 18 bps in fees per year from investors while trades in heavy volume of more than 7.7 million.
Again here, IBM is the fourth biggest firm in the basket with a 6.15% allocation. In terms of industrial exposure, the product is widely spread across computer & peripherals, IT services, software, Internet software & services and diversified telecom services that make up for double-digit allocation (read: 3 Internet ETFs Leading the Tech World Higher).
The fund has added nearly 14% so far this year and has a Zacks ETF Rank of 3 or ‘Hold’ with a ‘Medium’ risk outlook.
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