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Software Stocks Could Support Tech Rebound – ETF Trends

The first half of 2022 was unkind to equities, and technology stocks were among the most egregious offenders. Obviously, that’s a drag because tech is the most prominent sector exposure in a variety of broad market strategies.

Exchange traded funds such as the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM) aren’t dedicated technology offerings, but they are more than adequate proxies on the sector. Allocating about half their weights to tech stocks, QQQ and QQQM are clearly responsive to goings-on in the tech sector.

If the worst is behind in the group, and if it’s poised for better things in the second half of 2022, the Invesco ETFs could leave first-half disappointment in the rear view mirror. Fortunately, valuation is no longer a barrier to entry with tech stocks and ETFs.

“Although macroeconomic concerns are on the top of investors’ minds, we still see strong underlying secular tailwinds in technology, such as cloud computing and semiconductor adoption. Technology is now 20% undervalued and 21% undervalued within software, where we often see moaty companies,” noted Morningstar analyst Brian Colello.

That’s potentially good news for QQQ and QQQM because the Nasdaq-100 Index (NDX), which is the underlying index for both ETFs, is chock full of semiconductor and software stocks. Roughly 15 of the tech stocks in the ETFs are chip names. The funds’ significant software exposure is also relevant from a valuation perspective.

“Software remains the most attractive subsector, 20% undervalued. High-flying growth stocks from 2020 have crashed and many now trade well below our fair value estimates. Meanwhile, more mature, higher-quality software names now provide investors with an attractive margin of safety,” added Colello.

Previously among the highest-flying tech names, cloud computing stocks have come back to earth in considerable fashion. However, that isn’t altering the need for expanded cloud services, and that pullback is making valuations more attractive. That could be a catalyst for QQQ and QQQM because the ETFs are homes to multiple cloud names.

“In software, IT departments have been focused on digital transformation, first from the secular shift to cloud computing and software as a service, followed by the coronavirus pandemic and the critical rush to implement remote working tools. We foresee enterprises using software to modernize all types of business processes, in turn leading to software industry growth at a low-double-digit CAGR,” concluded Morningstar’s Colello.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.