The tech sector has really been the place to be in the market’s recent past. Over the past decade, a wave of technology disruption has changed all of our lives dramatically, powered by smartphones, cloud computing, and powerful internet platforms…
No surprise, the tech-heavy ETF Invesco QQQ Trust (NASDAQ:QQQ) has massively outperformed the broader market:
Despite tech’s massive rise, there are still great values to found in the sector today. Here are three great tech businesses that belong on your buy list.
Sure, Alphabet’s stronger-than-expected 23% revenue growth and massive earnings outperformance were nice to see as the company recovered from COVID-19 headwinds. But the real story was the first-ever disclosure of Google’s cloud unit profitability.
On that end, Google Cloud is racking up pretty hefty losses — much more than I expected:
|Google Cloud Unit Metric||2018||2019||2020|
|Revenue||$5.8 billion||$8.9 billion||$13.1 billion|
|Operating profit (loss)||($4.3 billion)||($4.6 billion)||($5.6 billion)|
So why did Alphabet’s stock surge higher, if the cloud unit is burning more cash than thought? Because that means the “core” businesses — Search, YouTube, Play store, and hardware — are all much more profitable than investors may have thought. Those businesses collectively made a whopping $54.6 billion in operating income last year, up 11.4% over 2019. But remember, the COVID-19 pandemic severely impacted results in the first two quarters of the year. For the fourth quarter, those businesses grew operating income a whopping 41% over the fourth quarter of 2019.
Likely, investors boosted Alphabet’s stock after earnings because they value the core businesses off of earnings, yet still value the cloud business off of sales. Since the core business is more profitable, investors may value it higher, while the value for the cloud business likely didn’t change that much. After all, many high-growth cloud software stocks are also racking up hefty losses, but investors have nonetheless bid them up to high valuations anyway due to strong revenue growth.
Alphabet’s $1.39 billion valuation is only 25.4 times the core Google services operating income for 2020, which would actually be a fine valuation based on that business alone. Yes, the cloud lost $5.6 billion, and Alphabet’s moonshot “other bets” segment, including Waymo and Verily, burned another $4.5 billion. Still, both of those segments likely have significant positive value.
Considering that you are basically getting these huge loss-making businesses for free and Alphabet still looks like a solid value even after its post-earnings pop.
T-Mobile (NASDAQ:TMUS) reported strong fourth quarter results last week, yet the stock slipped a bit in the aftermath. Why? Potentially, investors may have been…
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