US tech companies are among the most recognized and influential in the world. In this column, we will use the Nasdaq index to review their behavior throughout the year, and which forces should be considered.
The Nasdaq is a stock exchange that groups stocks from technology, information technology, telecommunications, and biotechnology firms, among others. This is why it has become a reference to track the companies of the sector. A particularly helpful tool for that purpose is the Nasdaq-100 index, which includes the 100 highest-priced shares of the industry. Its behavior can be observed in Chart 1.
Chart 1. Own elaboration. Data by Bloomberg
Although the last twelve months exhibit an upward trend – with a starting point of about 10,400 units and getting close to 14,500, denoting an annual profitability of 38.3% – this growth not so evident during the first quarter of 2021 (behind the red dotted line). However, as of May, the trend recovered its strength, maintaining a 2021 year-to-date profitability of 13.80%, a very similar figure to the one from January-July 2020, reaching 14.75%.
Which companies have driven the index in 2021?
To understand the behavior of an index, an analysis must be made of its basket to recognize which stocks are driving it. In the case of the Nasdaq-100, ten companies were responsible for 47% of the year-to-date variation. Within this group, the most representative three are Nvidia, Google, and Amazon, which, between January 1 and July 6, have grown by 57%, 47%, and 11%, respectively.
An aspect that must be considered about Google is that the index includes its Class A and C shares. Due to this, the company became the most representative of the year-to-date variation, with 293.4 points. Class A shares confer their owners voting rights, a benefit that Class C shareholders are not awarded; however, both types of stocks carry the right to receive dividends.
Chart 2. Own elaboration. Data by Bloomberg
For a view on how the markets perceives these shares, Chart 2 displays the percentage of analysts surveyed by Bloomberg as of July 6 who would recommend buying the ten stocks that drove the growth of the Nasdaq-100. It does not come as a surprise then that the three companies that have shown the highest records are the same three that contributed the most to the index’s growth year-to-date.
The e-commerce giant is undoubtedly one of the companies that benefited the most during the pandemic; its business model was specially designed to satisfy consumer demands when closures affected the traditional ways of obtaining goods and services. According to data published by Investing.com, the second quarter of 2020 brought Amazon a favorable surprise: its Earnings Per Share (EPS) reached USD 10.3, a much higher number than the expected USD 1.48. The trend kept exhibiting higher earnings than expected by the market for 2020 and 2021, when expected EPS was USD 9.54 against USD 15.79.
Even though its most recognized lines of business are e-commerce and Amazon Prime, investors are mostly focusing on other areas: cloud applications and storage. The expectation grows around the US Department of Defense JEDI Project, which was originally awarded to Microsoft, but later sought to include Amazon and other providers. The original contract had been put on hold, following a lawsuit by Jeff Bezos company alleging that the former President Trump exerted improper pressure on military officials to disadvantage them.
- Alphabet (Google).
A substantial part of Alphabet’s revenue comes from advertising, with YouTube as its largest contributor. Like Amazon, YouTube offers a type of product (video streaming) that has been highly demanded during the pandemic’s restrictive measures. The firm has registered EPS higher than expected for the last four quarters. The expected EPS for the first quarter of 2021 was USD 15.76 but reached USD 26.29.
Alphabet was able to capitalize on the decrease in expected inflation in the US, and along with other tech stocks, benefitted from the reopening of the economic sectors. On the other hand, the company is currently facing antitrust lawsuits in that country.
This company centers its activity on graphics processing units and Artificial Intelligence. Nvidia has two strong lines of business: graphics processing units aimed at specialized users, and the Tegra processor, for mobile devices, robots, and drones, among others. Following the earnings made by the AI in recent years, the chip manufacturer proposed dividing its shares into four parts and gave its investors three additional shares for each one they already owned.
Even though its products also benefitted from the pandemic in terms of the increased demand, and has shown higher EPS than expected, it was not as thriving as Amazon and Alphabet. For the first quarter of 2021, the expected EPS was USD 3.29, and the company reported USD 3.66. However, Nvidia’s stock price has been telling a different story since 2016, with a clear interest from investors. It has risen from USD 20 to USD 800, and has registered a 57% profitability so far this year.
Semiconductors, an element to consider
In previous columns and SupraWebinars, we have discussed an issue that probably remains central to analysts: semiconductors, and the development of a bottleneck between its supply and demand. Semiconductors are key as they are necessary for the manufacturing of chips, used in an increasingly wide range of industries, such as computers, automobiles, and mobile phones production.
According to the website icinsights.com, near 59% of the total sales projected at the end of 2020 are concentrated in three companies: Intel, from the US, with 24.27%, and Samsung and TSMC, from Taiwan, with 19.87% and 14.92% respectively. Of these, Intel produces and covers its own needs, which makes Samsung and TSMC concentrate much of the production of designs carried out by other companies, like Apple and Ford, which do not manufacture their chips.
There is yet another important factor that must be added to the bottleneck caused by the highly concentrated production: the geopolitical effect of the existing tensions between the United States and China due to Taiwan’s political status, considered by the Chinese government as a renegade province. Any development on this front could eventually affect TSMC and further reduce semiconductor production, which would have a major impact on the sales and profits of technology companies.
In conclusion, as seen last year, the technology sector remains an important driver of the US stock market dynamism. However, it involves its risks: either from the point of view of the supply chain or due to the constantly changing dynamics in a year that has not yet shown a clear trend in terms of consumption and remote work.
This report was made by Gandini Análisis for SupraBrokers only as content. It shall in no case be considered as an investment recommendation.