7 things investors are getting wrong about the tech sector and FAANG stocks

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  • Tech investors have had a rough two months as a number of the biggest names in the industry have tumbled into bear-market territory.
  • The FAANGs (Facebook, Apple, Amazon,Netflix, and Alphabet –Google), have seen around $US1 trillion in market value wiped out.
  • HSBC says investors concerns over the tech sector are overblown, and that it’s time to buy the dip.
  • The bank lays out seven misconceptions about the sector.

Tech investors have had a rough two months as many of the most-popular names have tumbled into a bear-market – down at least 20% from their recent highs.

The FAANG (Facebook, Apple, Amazon,Netflix, and Alphabet –Google) stocks, which were a key pillar of support for the market, have been among the hardest hit, seeing as much as $US1 trillion wiped out from the recent peak of their market values.

And with many of tech’s biggest names sitting at or near their lowest levels in months, HSBC says this is an opportunity to buy the dip. The firm is overweight on IT stocks that are focused on hardware and semis, such as Alibaba, Samsung Electronics, Xiaomi, and Yandex.

“The declines have come against a backdrop of rising concerns over a sharper slowdown in earnings, regulatory constraints, heightened valuations, and stretched positioning,” said a group of HSBC analysts led by Ben Laidler.

“While some caution is warranted, we believe that the extent of these concerns is overblown, and highlight seven misconceptions on the sector.”

Here is a snapshot of the seven misperceptions that HSBC says investors have right now:


1. Earnings are under pressure

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The FAANGs all beat Wall Street’s expectation for profits in their most recent quarterly reports, and HSBC says 70% of the global IT sector topped earnings-per-share expectations in the third quarter, the highest among all sectors.

“The market is not rewarding companies that beat expectations and is punishing those that miss more severely,” the firm’s analysts said.


2. The sector’s outlook is deteriorating

Fears over the tech sector were highlighted after industry leaders, including Apple,Amazon and AMD, offered disappointing revenue forecasts, and as Wall Street frequently downgraded their 2019 forecasts for tech stocks.

According to HSBC, the 2019 earnings-per-share growth expectations for Morgan Stanley’s MSCI ACWI IT index, which tracks IT stocks from both developed and emerging markets, have been slashed to 7.5% from 11% over the past two months.

But HSBC’s own tech earnings lead indicator, which aggregates a number of the timeliest IT data points, suggests that the sector is not in as bad of shape as feared.

While the bank’s lead indicator “had softened slightly earlier this year, alongside a pullback in broader activity data, it has begun to pick up again and it is now at levels consistent with IT EPS growth of above 20%,” HSBC said.

“This has been driven by a variety of the underlying series improving, including US durable goods orders of computers and related products, the FRB San Francisco Tech Pulse Index, and South Korea Electronic exports.”


3. It’s all about trade and tariffs

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Investors have also attributed some of the blame on tech’s sell-off to ongoing trade tensions between the US and China, but HSBC says the trade war should have a limited impact on earnings in the sector.

The Trump administration has so far posted tariffs on $US250 billion Chinese imports. This week, President Donald Trump hinted at the possibility of a 10% tariff on consumer goods such as Apple’s iPhones and laptops.

“A further escalation in trade tensions does pose a significant threat to the US IT sector,” Laidler said. “However, we believe the current tariffs will only have a minor impact on earnings.”

According to Laidler, China only accounts for just 9% of US IT sector revenues, and the imposed trade measures would take as little as 1% off of US earnings. He added that a lot of the risks surrounding trade tensions seem to be at least partly priced in, as the most-exposed stocks already trade at a 30% discount.


4. Tech is cyclical

Unlike the US economy that has natural fluctuation between periods of expansion and contraction, the tech sector “appears less cyclical,” the team said.

According to HSBC data, the tech sector has become less sensitive to lead economic indicators. For example, its correlation to the manufacturing indicator ISM index has now fallen dramatically to 8% from 35% in 2015.

“Tech has become a large receiver of capex spending,” the analysts noted.

“We believe the tech stocks are well positioned to weather the current economic backdrop and are less susceptible to a cyclical slowdown than many investors currently believe.”


5. It’s all about growth

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“At a time when there are concerns about being in a late cycle environment, we believe tech provides a particularly appealing risk/reward for investors,” said Laidler. “On top of the robust growth story, the tech sector exhibits many defensive characteristics.”

He added that tech is the only net cash sector globally, giving significant flexibility, and that it now has a combined dividend plus buyback yield well above market.

“These characteristics would help the sector outperform in some of the tail risk scenarios, such as an economic slowdown,” Laidler said.


6. Valuations are expensive

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“Tech valuations are relatively inexpensive, and comparisons with the tech bubble in 2001 are unjustified,” said HSBC analysts.

“The majority of the tech’s outperformance over the last few years has been driven by earnings growth, and not by valuation multiple expansion.”

The continued: “The IT sector trades at over a 20% discount to long-term average PE, while hardware and semis trade at a discount to the current market multiple.”


7. The tech sector is over-owned

Investors’ active weight of the global IT sector had been increasing, but this is merely closing a previously long-held underweight stance, according to HSBC.

“Compared to the rest of the global sectors, the active weight in the IT sector is neutral,” the bank’s analysts said.

According to firm, there is a significant divergence between the industry groups. For example, software and services is the most over-owned industry group globally, tech hardware is neutral, and semiconductors is the most under-owned industry group behind utilities. Moreover, key sector stock Apple was among the largest single-stock underweights globally.


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