I just recommended a small-cap tech stock to my subscribers that I want to tell you more about in a minute. But first, let’s look at the broader tech-stock picture to understand why this particular stock is performing so well.
Technology Stocks Lead the Pack
Investors have been hard pressed to find a better place to park money in this market than technology stocks. Since the beginning of July, the Nasdaq is up over 7%, easily topping the S&P 500’s and Dow’s -1.5% over the same period.
That performance has been aided in no small part by the stellar performance of the Nasdaq’s top five technology stock holdings: Amazon (AMZN), Facebook (FB), Alphabet (GOOGL), Apple (AAPL) and Microsoft (MSFT).
None of these stocks has lost much momentum (indicated by a significant break below the 50-day moving average line) since the summer. And each has risen by more than 12% since the beginning of July.
Of the five, analysts are particularly bullish on Amazon, Facebook and Alphabet right now. Just try to find one analyst that doesn’t think all three are going higher! Credit Suisse has been the latest to pound the table, raising price targets on each of the three stocks on Monday by 14%, 11% and 14%, respectively.
At first blush, it might seem that these three companies are benefiting from a broad sector move in technology stocks. And I think that’s partially true. But there’s more to the story of what’s powering these three technology stocks than that generalization.
Amazon vs. Facebook vs. Alphabet
Besides being massive tech companies, Amazon, Facebook and Alphabet all have something else in common. The trio is hugely influential in the digital age, and has done as much (if not more) than any other three companies to shape the modern internet. They invest heavily, develop and acquire new technologies rapidly, and tend to be far more aggressive (and successful) in pursuing growth agendas than the market gives them credit for.
It appears all three are also entering a period of accelerating profit growth. Consensus estimates suggest all three are in a period of more subdued spending than that which persisted from 2012 through 2014. And that implies they’ll be reaping the profits of the strategic investments they’ve made over the past five years or so.
Consider the following:
Amazon delivered EPS of just $1.25 last year. EPS is projected to surge 368% to $5.85 this year, then jump by another 80% to $10.85 next year. This assumes average annual revenue growth of around 25%.
Facebook delivered EPS of $2.28 last year. Analysts see EPS of $3.94 (+73%) and $5.07 (+29%) this year and next, respectively. That’s assuming 52% revenue growth this year, and 35% in 2017.
Alphabet, which will average a comparably paltry revenue growth rate of 16.5% over the next two years, is expected to grow EPS by 15.3% and 18.6% in 2016 and 2017, respectively.
These are big growth numbers. And in the cases of Amazon and Facebook, they suggest that earnings growth is going to be far greater than revenue growth. The implication here is that these three companies are entering a harvest period during which they’ll reap the benefits of years of heavy investing. With a little luck, investors should be able to partake in the feast.
Specifics matter. So I did a little digging to see what exactly are expected to drive earnings materially higher going forward. Some product-related things jumped out at me.
Facebook is expected to begin monetizing Messenger early next year. It is also expected to announce a new prospecting product, which should help advertisers reach more customers. Then there is incremental growth from the rollout of advertising from Instagram that might not be fully baked into the current share price. These are just a few of the reasons analysts have been bumping up their price targets ahead of the company’s November 2 quarterly earnings report.
Amazon is expected to enjoy a lift in profit growth as Amazon Web Services gathers momentum and, critically, requires less CapEx spending. The company has also been disclosing metrics for its Amazon Business segment, an e-commerce site for business owners looking to stock up on everything from chairs to pretzels. Given that the business-to-business industry is much bigger than the business-to-consumer market, that Amazon Business is adding around 100,000 new accounts per quarter, is growing sales by 20% month-over-month, and is becoming a legit challenger to Staples, investors should be aware of the sizable opportunity the new service represents. The Street loves Amazon right now. Virtually every firm has a buy rating on the company, which reports quarterly results on October 27.
And then there’s Alphabet. Word on The Street is that advertisers are reporting higher spending on search ahead of the all-important Holiday season. The company has been working to close the gap between mobile-specific and desktop-specific monetization opportunities. The strategy makes sense, as consumers are now frequently working and making purchases on both types of devices.
Specifically, Alphabet released Expanded Text Ads (ads designed for a mobile-first world) to help juice search sales. And it has potential for significant sales growth through non-search products YouTube and Google Play, as well as the company’s newly released phones and connected home devices. Alphabet reports on October 27.
Buy This Small-Cap Tech Stock Now
I think investors can buy any (or all three) of these stocks right now and do well in the months ahead. They’re staples of any growth-oriented mutual fund, so in all reality if you own funds of that nature you probably already have exposure. But buying the stocks outright makes sense too, if you’re looking to grab significantly greater returns than any mutual fund can offer.
Another market-beating option for risk-tolerant investors is to add high-growth small-cap tech stocks to their portfolio. Every month, I look for small-cap tech stocks that have growth profiles and charts as good as (if not better than) the best performing large-cap tech stocks.
I just sent a detailed report on one such technology innovator to Cabot Small-Cap Confidential subscribers two weeks ago. This is what I wrote:
“Four years ago, I ditched my landline in favor of a Voice over Internet Protocol (VoIP) phone. The decision was based on huge cost savings and superior features. My experience is far from unique. Today, more American households are using VoIP phones than traditional landlines. Businesses, which have been slower to convert, are now changing over too. This year, Cabot’s office made the switch. VoIP technology has empowered our customer service staff to serve you better, no matter where they are. And it saves us money too.
“The company I’m recommending today has the best VoIP solution on the market for home and small office use. On the company’s last conference call, three of the six analysts present called in using the company’s solution! It’s growing revenue by 20%. The company’s first quarterly EPS gain will be a major milestone, and should arrive with the quarter ending in either April or July 2017. It is smaller, less well known, and undervalued compared to its technologically inferior competitors. Better still, the stock is in the midst of a one-month consolidation pattern and looks like a great buy today.”