Semiconductors: Powering Growth in a Risky Market
As geopolitical and economic dangers worsen, investors are eager for any good news. They’re finding reassurance in the technology sector, which has kicked off its earnings season with auspicious results.
Case in point: Bellwether Netflix (NSDQ: NFLX) on Monday posted mostly solid operating results for the first quarter, with a few caveats. The streaming entertainment channel missed its guidance on subscriber growth, adding just 3.52 million new international users instead of the predicted 3.7 million, and 1.42 million U.S. users instead of 1.5 million.
More importantly, though, Netflix still met its predicted revenue of $2.64 billion in the first quarter. Earnings also turned in a solid beat, coming in at 40 cents instead of the predicted 37 cents.
That’s a good start to the season, especially since tech investors in general could have headed for the exits if closely watched Netflix had laid an egg. Expectations are high for the tech sector, with analysts expecting average earnings growth in excess of 13% in the quarter, the third highest growth prediction across the eleven sectors.
Enthusiasm for tech equities abounds. Year to date, the benchmark iShares US Technology ETF (NYSE: IYW) is up 11.1%, compared to a gain of 4.6% for the S&P 500.
Despite that optimistic outlook there are isolated voices in the wilderness saying that technology is overvalued, especially since it has been the top-performing sector over the past three years. Right now, the sector is trading above its price-to-fair value ratio, though only slightly, so the bears probably would have punished the entire sector if Netflix had badly missed.
The semiconductor segment is particularly poised for outsized gains. Chip demand has been taking off thanks to several tailwinds, including smart cars, the Internet of Things, aerial drones, artificial intelligence, and virtual/augmented reality.
Market forecaster Gartner predicts that the chip market will post year-over-year revenue growth of 12% this year, up from its 7.2% prediction just a few months ago. Gartner expects semiconductor industry revenue to reach nearly $400 billion this year.
In addition to robust demand, the tech sector faces potential stimulus from Trump’s promised tax reform bill. While the health care debacle doesn’t inspire confidence in the GOP’s ability to deliver, the tech sector would get a huge boost if Congress manages to get a reform bill done, especially one that includes a tax holiday on repatriating foreign cash. Apple (NSDQ: AAPL) alone is holding roughly $230 billion outside the U.S.
If tech giants are allowed to bring their enormous cash hoards back home to get taxed at a lower rate, they’d probably use much of that money for mergers and acquisitions, as well as greater research and development. The result would be akin to a shot of steroids to the tech sector and the wider economy.
To be sure, the tech sector now trades at lofty valuations. However, there are enough positive factors in place to expect healthy growth this quarter, with semiconductors leading the way.