After crashing in March, the U.S. stock market rebounded strongly in the months of April and May from the pessimism surrounding the coronavirus crisis. Optimism over a potential vaccine for COVID-19 and an uptick in economic activities, as lockdown measures are now starting to ease, are mainly driving the U.S. stock market.
The technology sector played a crucial role in the quicker-than-expected recovery of the stock market. During the April-May period, the tech-laden Nasdaq Composite index gained 24%, bringing the index’s year-to-date return to +5.8% at the end of May from the -14.2% witnessed at the end of March.
The Technology Select Sector SPDR (XLK), the most important component of the broad market index, rallied 21.9%, during the April-May period. Moreover, the ETF has a positive year-to-date return of 6.8%.
Among the Nasdaq’s 100 components, 52 stocks have registered positive year-to-date returns, of which 21 are from the Computer and Technology sector.
What’s Driving the Tech Sector’s Outperformance?
The coronavirus outbreak has, surprisingly, opened up newer avenues of growth for tech companies. The pandemic-led global lockdown is fueling demand for PCs, notebooks and peripheral accessories, as more and more workers and students are now working and learning from home.
The work-and-learn-from-home necessity is also stoking demand for cloud storage. Furthermore, the lockdown has bolstered the usage of online and e-commerce services globally. Therefore, data-center operators are enhancing their capacities to accommodate the demand spike for cloud services. (Read More: 6 Remote-Working Software Stocks to Ride on Virus-Led Lockdowns)
Furthermore, the long-term growth prospects of tech companies look promising owing to the continuous digital transformations. Rapid adoption of cloud computing, along with the ongoing integration of AI and machine learning, has been a major growth driver.
The accelerated deployment of 5G technology — the next-generation wireless revolution — is likely to spur further growth. Moreover, blockchain, IoT, autonomous vehicles, AR/VR and wearables offer significant growth opportunities.
What Should Investors Do?
Considering the healthy growth prospects of tech companies, it makes sense to invest in this space for long-term gains. Amid this economic and financial instability, it is a prudent idea to pick solid growth companies as these are financially stable, reaping profits in established markets. These stocks, with their healthy fundamentals, help investors hedge their investments from any economic downturns.
Furthermore, the technology sector is likely to benefit the most from the reopening of the U.S. and global economies after two-three months of partial or full lockdowns that were imposed to prevent the spread of coronavirus.
Here, we have zeroed in on five Nasdaq-traded tech stocks that are well poised to benefit from this space’s solid growth prospects.
These stocks also have favorable combinations of a Growth Score of A or B, and a Zacks Rank #1 (Strong Buy) or #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Per the Zacks’ proprietary methodology, stocks with such favorable combinations offer solid investment opportunities.
Dropbox DBX, which currently sports a Zacks Rank #1, is benefiting from the shift in demand trend owing to the coronavirus outbreak. The company, which has a Growth Score of B, offers a platform that enables users to store and share files, photos, videos, songs and spreadsheets.
Due to the global lockdown situation, workers now need to work from home which is stoking demand for cloud storage. Moreover, the company is benefiting from the evolving workspace demands for seamless enterprise communication tools. Further, integration with leading applications like Zoom Video, Slack and Atlassian will likely expand the Dropbox paying-user base over the long run.
The company’s earnings are expected to soar 48% year over year to 74 cents per share in 2020.
Dropbox, Inc. Price and Consensus