The Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM) are often viewed as technology sector proxies. That assessment is accurate because the funds allocate more than half their weights to that sector.
However, that shouldn’t imply that investors should overlook the funds’ other sector exposures, including communication services. That group accounts for almost 16% of the QQQ/QQQM portfolios and is home to some beloved mega-cap growth stocks such as Facebook parent Meta Platforms (META) and Google parent Alphabet (GOOG). That duo combines for approximately 10% of the QQQ/QQQM rosters.
That heft implies those stocks can be drivers of QQQ/QQQM performance. And with the ETFs up 7.67% over the past month, the time could be right for investors to examine what’s contributing to the resurgence. Indeed, Magnificent Seven names — a group including Alphabet and Meta — are contributing to the rally.
Cost of Admission Looks Interesting
Rare are the occasions when discounted valuations are viewed as credible catalysts for QQQ/QQQM upside. But attractive valuations currently support the cases for the two largest communication services components in the Invesco ETFs.
“So for Alphabet, it’s a 4-star-rated stock. Trades at a 20% discount to fair value. As you noted, we did increase our fair value to $209 per share. Again, that company is still just hitting on all cylinders. We think the market right now is probably being overly pessimistic regarding some of the antitrust issues there,” noted Morningstar analyst Dave Sekera.
Alphabet is up on a year-to-date basis. But the stock has trended lower over the past several years amid speculation the results of the upcoming presidential election could intensify regulatory scrutiny of the company. On Monday, reports surfaced that the Department of Justice could propose steps paving the way to break up Google’s stranglehold on internet search.
Valuation Appeal
Regarding Meta, valuation is also somewhat appealing as is the company’s potential to leverage artificial intelligence over the long haul.
“We increased our fair value on that one to $560 per share. And the change in Meta was really just because we’re now incorporating what I consider to be a more optimistic outlook on the company’s ability to use AI to improve its ad-targeting business,” added Sekera.
Comcast (CMCSA), another QQQ/QQQM communication services holding, has a strong balance sheet and valuation appeal, too.
“The cable companies, including Comcast, will need to increase network spending in the coming years to keep pace with the phone companies’ fiber network capabilities but we expect cable cash flow to grow modestly over the coming years. In our view, the NBCUniversal business isn’t as strong, but it remains an important media asset,” according to Morningstar’s Michael Hodel.
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