Given the indomitable rises of some members of the “Magnificent Seven,” there’s no shortage of claims that those and other large- and mega-cap tech stocks are stretched on valuation.
That implies ETFs, including the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM), are often the subject of chatter regarding rich multiples. But some market observers see things differently. Their diverging viewpoints center around the abilities of the marquee members of QQQ and QQQM to consistently generate powerful earnings per share (EPS). That commands higher multiples, while also expanding margins.
Combine that with the sizable cash hoards sported by many mega-cap communication services and tech companies, including QQQ and QQQM member firms, and it’s reasonable to argue some of these names merit elevated valuations and might offer more value than meets the eye.
EPS Dominance Indicates QQQ Has Some Value
QQQ and QQQM are unlikely to ever be conflated with true value funds. But the EPS growth of some of the ETFs’ big names implies there is some value to be had.
“Mega-cap tech firms accounted for a record high 23% of [S&P 500] earnings in Q4,” Ajay Rajadhyaksha of Barclays wrote in a recent report to clients. “In other words, while Big Tech is 30% of the index, it is also a very large part of earnings. Moreover, EPS for the six largest technology firms (by market cap) was up a stunning 60% y/y. And margins have continued to expand, and are now nearly 25%.”
Valuations on some QQQ and QQQM holdings are slightly above long-term averages. But that situation isn’t alarming. And those multiples on big growth stocks are comparable to what’s found with small-caps. And small-caps have trailed mega-cap tech for an extended period.
“As a result of this earnings growth, the relative valuations of the market’s biggest companies aren’t terribly different than their smaller peers, even if they are elevated compared to historical averages,” reported Jesse Pound for CNBC.
Perhaps surprising to some investors, there’s also an element of safety offered by QQQ and QQQM. The ETFs could be subject to downside if the U.S. economy contracts or the broader market falters. So it’s possible that even if the economy slows, these funds could prove less bad than some rivals. That’s because a sluggish economy would likely prompt investors to emphasize earnings growth and strong margins. Those traits are offered by many QQQ/QQQM components.
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