By Ambrose O’Callaghan
The technology sector has put together a strong performance in the year-over-year period as of early afternoon trading on Tuesday, February 6, 2024. For example, the S&P 500 Information Technology Index has delivered a year-over-year return of 47% at the time of this writing. The tech sector, and the United States stock market at large, has been dominated by the performance of the “Magnificent 7” in 2023 and early 2024. The “Magnificent 7” are Apple, Amazon, Alphabet, Meta Platforms, Microsoft, Nvidia, and Tesla. Today, we’ll explore the performance of two big names and get a handle on the tech sector at large after many of the biggest names have unveiled their final batch of earnings for fiscal 2023.
“Tech companies have generally managed to report solid earnings so far this quarter,” said Harvest ETFs Portfolio Manager James Learmonth. “That highlighted continued strength in spending on artificial intelligence initiatives. In the shorter term, there has been a significant run in the sector over the past year and while there exists some potential for a consolidation period, momentum has continued, and the growth drivers remain in place.”
James Learmonth manages the Harvest Tech Achievers Growth & Income ETF (HTA:TSX). This ETF seeks to tap into large-cap tech companies that now lead this sector. HTA holds those leading companies to deliver both income and the growth opportunities investors seek in tech.
Which tech company’s earnings beat expectations in the winter of 2024?
Meta Platforms, which is one of the premier equally weighted holdings for HTA, unveiled its fourth quarter (Q4) and full year fiscal 2023 earnings on Friday, February 2, 2024. The company reported adjusted earnings per share (EPS) of US$5.33 on revenue of US$40.1 billion in the final quarter of fiscal 2023 – up from reported revenue of US$32.2 billion in Q4 FY2022. It beat analysts’ expectations with its Q4 2023 performance.
The company delivered advertising revenue of US$38.7 billion, which also beat analyst projections. Moreover, Meta reported 2.11 billion Facebook daily active users (DAUs). Ad impressions rose 21% from the prior year while the average price per ad declined by 2%. Meta also announced an additional $50 billion in share buybacks and its first every quarterly dividend payment.
Microsoft also put together a very strong earnings report. The multinational technology giant delivered revenue growth of 18% year-over-year to US$62.0 billion in the quarter ended December 31, 2023. Meanwhile, operating income jumped 33% to US$27.0 billion. Net income rose 33% to US$21.9 billion while non-GAAP net income delivered 26% growth. Diluted earnings per share (EPS) were reported at US$2.93 – up 33% compared to the previous year.
Shares of Microsoft have jumped 13% in the year-to-date period as of late morning trading on Friday, February 9, 2024. Meanwhile, Meta Platforms stock has surged 36% over the same period. These are the kind of equities that HTA seeks to harness to fuel growth and provide income through covered calls to Unitholders.
Where the tech sector is headed going forward
While this period of impressive earnings is encouraging, Portfolio Manager James Learmonth monitoring for any changes in momentum that “Could come from the risk of a pause in spending at some point as companies ‘digest’ the equipment purchased over the past 12 months or so from the roll-out of new products,” HTA Portfolio Manager James Learmonth said. “Many end user focused companies have yet to definitively demonstrate that they can effectively monetize AI solutions to the degree currently expected by investors. That is why we want to own the best-in-class companies that have proven platforms to capitalize on the long-term trend.”
“We remain positive on the sector over the intermediate to longer term,” James continued. “Growth drivers, such as artificial intelligence, cloud-based infrastructure, and other digital transformation initiatives, continue to drive spending. Cybersecurity also remains a key area of investment in an increasingly connected world, particularly given today’s geopolitical climate.”
How HTA is positioned in the current climate
At the time of this writing, HTA has 40% exposure to software as a sub-sector, 29% in semiconductors & semiconductor equipment, and 10% in communication equipment. In June 2023, Bloomberg Intelligence projected that Generative AI had the potential to become a US$1.3 trillion market by 2032. The increased demand for generative AI products could add about US$280 billion of new software revenue, according to the research report.
The semiconductor industry is another growth driver. McKinsey projected that the semiconductor space could also grow into a trillion-dollar industry by 2030.
“HTA remains well positioned for this type of environment,” James states. “With exposure to several of the ‘Mag 7’ names but in an equally weighted and diversified technology portfolio. The covered call strategy also benefits from high levels of implied volatility, generating significant cashflow for Unitholders while maintaining a long bias towards an exciting growth area.”
HTA has delivered annualized returns of 15% since inception as at January 31, 2024. Moreover, HTA has delivered distribution-growth for three consecutive years. It last paid out a monthly distribution of $0.1200 per unit. That represents a current yield of 8.14% as at February 8, 2024. In November 2023, HTA won its second consecutive LSEG Lipper Fund Award for Best Sector Equity Fund over 5 Years (Class U).
This award-winning ETF has delivered growth and consistent monthly distributions since its inception.
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