Broadcom (AVGO) is the best networking development platform with a strong AI tailwind that is expected to grow its Ethernet switching business by 4x yoy. It pays a $18.40/share annual dividend and has a forward P/E of only 15.5x. Meanwhile, the IGM ETF is highly valued but continues to have a strong 10-year average annual return of 16%. Despite its big sell-off last year, it has still outperformed the S&P500. Ann Winblad, co-founder and managing partner of Hummer Winblad Venture Partners, thinks that “AI will likely fuel the next stage of innovation” and cited Microsoft, Google, Nvidia, Apple, and Amazon as potential winners. Finally, investors who sold out of the technology sector after the bear market last year are likely kicking themselves, as the technology sector has whooped the Financials so far this year, and it’s expected to continue through the rest of this year and for many years to come.
The Technology Sector has been a standout in the stock market so far this year, outperforming other sectors. While energy and finance sectors have been beaten down due to higher interest rates, recession fears, and concerns about the banking system, the tech sector has rallied strongly due to the cash-rich nature of big tech companies that do not require borrowing at any interest and still generate strong free cash flow. The iShares Expanded Technology ETF (NYSEARCA: IGM) is a well-diversified fund that investors under-allocated in the technology sector should consider buying.
Data by YCharts shows that IGM ETF has outperformed the S&P 500 and DJIA represented by the Vanguard S&P500 ETF (VOO) and SPDR DJIA ETF (DIA) respectively. Furthermore, it has clobbered the SPDR Energy Select ETF (XLE) and SPDR Financials ETF (XLF) year-to-date, and even outperformed the Nasdaq-100 Trust (QQQ) this year by almost 0.9%. This comes as a surprise to some investors who had expected tech stocks to remain under pressure due to rising interest rates, but the Federal Reserve has decelerated its rate increases from 0.75% to 0.50%, and then to two successive 0.25% increases this year.
Investors should consider taking advantage of the growth of the tech sector, which is expected to continue in the near future. The sector’s success is due to the nature of cash-rich big tech companies that do not require borrowing at any interest and still generate strong free cash flow, making them a reliable investment.
The Federal Reserve’s tightening cycle is expected to come to an end soon due to the recent instability in the banking sector and concerns about a damper on the economy. This could lead to interest rate cuts over the next 12 months, which would benefit technology investors. Furthermore, a strong U.S. dollar is a foreign currency headwind to the U.S. dollar-denominated earnings of most technology stocks, so a lower dollar would be good news for them.
The iShares Expanded Tech Sector ETF (IGM) is a good investment opportunity for investors looking to benefit from the growth of the technology sector. Google’s parent company, Alphabet (GOOG), is the top holding in the IGM ETF with a 9.2% weight. Google is a strong company with a vast array of services and strong global branding, and it generated $16 billion of FCF during Q4 2022, which was 21% of total Q4 revenue.
Investors interested in the IGM ETF can find detailed information on the fund’s website, which includes a breakdown of its top 10 holdings. In addition to Alphabet, other holdings include Apple, Microsoft, Amazon, and Facebook.
Overall, the technology sector has shown strength this year due to the cash-rich nature of big tech companies that generate strong free cash flow and do not require borrowing at any interest. This has made them a reliable investment, and the IGM ETF is a good way for investors to gain exposure to the sector.
Investors looking to “bank on tech” should consider the cash-rich nature of big tech companies. For example, Google’s cash position is larger than the entire market caps of financial companies like Morgan Stanley, Wells Fargo, and Goldman Sachs, which are worth $144 billion, $138 billion, and $111 billion, respectively. Additionally, Google generated more free cash flow (FCF) in Q4 than Exxon, even during an energy up-cycle and tech down-cycle.
Microsoft is another strong company in the tech sector, with an 8.9% weight in the iShares Expanded Tech Sector ETF. It ended its Q2 FY23 with $99.5 billion in cash and cash equivalents and experienced 22% YoY growth in Microsoft Cloud revenue (26% on a constant currency basis). Microsoft also has other catalysts, including its investment in Open AI and positive regulatory news regarding its effort to acquire Activision Blizzard, which saw ATVI stock jump 5.9% today.
Investors interested in the iShares Expanded Tech Sector ETF can gain exposure to these cash-rich tech companies, which are generating strong FCF and do not require borrowing at any interest. These companies have shown to be a reliable investment and have performed well in comparison to other sectors, such as the financial and energy sectors.
Apple, the tech giant, has a 8.5% weight in the IGM ETF. The company ended Q1 FY23 with $30 billion in cash after returning $25 billion to shareholders. Although Apple is facing supply chain challenges to reduce its dependence on Chinese manufacturing, the stock is up 28% YTD.
Visa and Mastercard, two credit card processing companies, are allocated 6% of the IGM ETF portfolio. Visa has recently increased its offer to buy Pismo, a Brazilian fintech company, for $1.4 billion. Pismo is backed by Amazon and SoftBank, and operates a cloud-based banking and payments platform for banks. Mastercard has acquired Baffin Bay, a cloud-based cybersecurity company, to add automated threat protection services to its cybersecurity offerings, which will enable businesses to ward off cyber attacks.
Broadcom is one of the top-10 holdings of the IGM ETF with a 2.4% weight. With the AI arms race in full swing, Broadcom’s networking development platform is a sure-fire winner. The company offers the best line-up in the business, from switches to optical interconnect, and is always one step ahead of the competition. Hyperscalers like Microsoft, Google, and Amazon, who are focused on regenerative AI, require high-speed networking to feed massive amounts of mega data residing in the cloud to keep their AI and ML algorithms running. On the Q1 FY23 conference call, CEO Hock Tan noted that in 2022, Broadcom’s Ethernet switch shipments deployed in AI were over $200 million. With the expected exponential demand from hyperscale customers, Broadcom anticipates that this could grow to well over $800 million in 2023. The company’s Ethernet switching business is expected to grow by 4x yoy with a strong AI tailwind moving forward. With Broadcom at the forefront of the AI arms race, the company’s position in the IGM ETF is a strong one.
Broadcom Inc: The Best Networking Development Platform
Broadcom Inc. is a semiconductor company with a 2.4% weight in the top-10 holdings. The company has the best networking development platform on the planet and is ahead of its competitors. Hyperscalers like Microsoft, Google, and Amazon that are focused on regenerative AI require high-speed networking and Broadcom has the best lineup in the business. According to CEO Hock Tan, in 2022, Broadcom’s Ethernet switch shipments deployed in AI were over $200 million, and with the expected exponential demand from hyperscalers, they forecast that this could grow to well over $800 million in 2023. Thus, the company’s Ethernet switching business is expected to grow by 4x yoy, with a strong AI tailwind moving forward.
iShares Expanded Tech & Software ETF is the most highly exposed to the semiconductor sub-sector. In 2022, the ETF was down by a whopping 35.9% but still has a 10-year average annual return of 16%. Last year’s sell-off was overdone, and the ETF is +17.3% YTD. The XLK and QQQ ETFs have out-performed the IGM ETF, which has outperformed the IGV ETF by 15% and the S&P500 – as represented by the VOO ETF – by 22.4%.
Broadcom’s Q1 EPS Report
Broadcom’s Q1 EPS report was another strong top and bottom-line beat. Revenue of $8.92 billion was +15.7% yoy, and the CFO of Broadcom Inc., Kirsten Spears, stated that they generated $3.9 billion in free cash flow, representing a 16% increase year-over-year. Broadcom pays a $18.40/share annual dividend, currently yielding 2.88%, and trades with a forward P/E of only 15.5x. At the current price of $636, AVGO stock is a steal and is regarded as an all-weather semiconductor company.
Risks
Despite the big sell-off last year, the IGM ETF is still a highly valued fund that trades at a significant premium to the market, as seen in the ETF valuation metrics.
The Technology Sector has been on the rise, with strong returns for investors who have held on through the market’s ups and downs. Despite the risks posed by inflation and interest rate hikes, these companies have large cash positions and strong free cash flow generation, making them well-positioned for future growth. In fact, many industry experts believe that AI will fuel the next stage of innovation, with companies like Microsoft, Google, Nvidia, Apple, and Amazon poised to be the big winners.
One way to invest in the Technology Sector is through the iShares Expanded Tech Sector ETF (IGM). Although the ETF was down 35.9% last year, it still has a strong 10-year average annual return of 16%. While the ETF is highly-valued and trades at a significant premium to the market, many believe that the premium is warranted given the fundamental drivers of the technology industry, such as the cloud, AI, and high-speed networking.
One of the top holdings in the IGM ETF is Broadcom (AVGO), which is expected to see significant growth in its Ethernet switching business due to the increasing demand for high-speed networking required for AI and ML algorithms. Broadcom has the best line-up in the business, making it a sure-fire winner in the AI arms race.
Investors who sold out of the technology sector after last year’s bear market may be regretting their decision, as the sector has outperformed other sectors such as Energy and Financials this year. Trying to predict market movements and sector rotations is extremely difficult, even for professional money managers. Therefore, a well-diversified portfolio that includes the Technology Sector is a smart long-term investment strategy.
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