Large cap Tech Stocks are on fire!

An interesting trend has been taking place over the last few months which has seen technology stocks reverse their poor performance of 2016.
Technology stocks were the whipping boys towards the latter portion of 2016. With Trumps ascendancy into the White House, there were concerns that Republican policies would favor old-school telecom and incumbents at the expense of the internet giants and technology start ups..While the jury still out on the extent of the impact of Trump policies on tech it’s fair to say that tech stocks have significantly outperformed since the beginning of 2017.

Markets go through ups and downs sometimes without any rhyme or reason but ultimately they always return back to earnings performance and that’s ultimately what drives the long-term performance of a stock. In Google and Amazon’s case, exceptionally strong revenue growth and correspondingly good earnings performance have seen both stocks significantly outperform the broader index in the first part of 2017. Google stock is up almost 17% year-to-date while Amazon stock is up more than 23%.

While the business performance and underlying growth trends for Google and Amazon look positive going forward it’s fair to say that Trump’s policies are not without adverse implications for large tech in particular Trump’s propose scaleback of H1B provisions which provides the large influx of high-tech workers that the tech giants rely on.

Additionally, a progressive rollback of net neutrality provisions have the potential to thwart the tech giants steady growth. However in my view I don’t believe that either of these actions will necessarily derail the tailwinds that are propelling the revenue, earnings and share price gains that large tech have experienced these last few months.

A reduction in H1B visa’s for large tech companies is probably to see a progressive off shoring of these jobs to emerging tech sectors in Israel, India and Eastern Europe largely to the detriment of US workers. The outsourcing firms like Wipro and Infosys will suffer, however overseas economies will greatly benefit.

While net neutrality is a thornier issue I think it remains to be seen how the final provisions get implemented. If the incumbents like Comcast AT&T and Verizon are able to zero rate or favorably treat their own traffic that may provide a subset of advantages to them at the expense of startups. However the consumer will ultimately be the primary determinant of the services that are consumed and I don’t see favorable data charges shifting consumer preferences in favor of services provided by the cable and Internet providers at the expense of Google and Amazon and Facebook. Brand recognition and a high quality user experience will continue to see these brands thrive.

What’s been the biggest revelation for me with the performance of large cap tech over the last few months has been that even companies with mega market caps in the hundreds of billions of dollars can still experience outsize sales growth if they have tailwinds that are propelling the business.

In Google’s case that’s still evident from the shift of off-line to online advertising. Arguably one can even make the case that this tailwind has further to go given online viewership is accounting for more and more time spent, yet advertising dollars flowing are still yet to fully reflect this trend.

Similarly, in Amazon’s case, e-commerce is accounting for a greater and greater share of purchases and the rate of failure of off-line retail suggests that this trend is going to continue in force for the foreseeable future.

What’s been clear to me is that I’ve consistently underestimated the growth potential that large cap tech still looks set to have over the foreseeable future. I’ve attempted to correct this to some extent by taking more meaningful stakes in both Amazon and Google through the course of 2016 and have been pleasantly surprised by their share price appreciation so far this year.

I still believe that large cap tech is favorably priced compared with the earnings growth that these businesses will continue to experience for the foreseeable future. Further, with the economy continuing to chug along and consumer confidence steadily increasing, Google and Facebook should continue to experience organic advertiser growth, while the destruction of off line retail will continue to benefit Amazon.

On the other hand, the rest of the S&P 500 which has ridden a steady upswing as result of the Trump trade still looks incredibly overpriced to me and I’m avoiding more broad-based accumulation of other stocks in the index.

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