Investors were disappointed by mega-cap tech guidance last week — but UBS says investors should stay invested and focus on 3 key areas

• Technology investors were tested on Friday after strong earnings reports from mega-cap earnings like Amazon, Facebook, and Apple were still followed by sharp declines in share prices.
• Traders elected to focus on tepid profit-growth outlooks, rather than the past quarter’s better-than-expected results.
• Despite the negative earnings reaction in Friday trades, investors should stick with technology stocks for the long term, UBS said in a note on Friday.
• The firm lays out three long-term technology themes investors should stay focused on.
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Technology stocks took it to the chin on Friday after mega-cap tech like Apple, Amazon, Alphabet, and Facebook reported earnings for the third quarter.

While Alphabet shined and surged as much as 8% on Friday, Apple, Amazon, and Facebook slid considerably on Friday as investors weighed better than expected earnings reports with tepid and uncertain outlooks for the next quarter.

The tech-led selloff sent the Nasdaq 100 index down by as much as 3.4% by Friday afternoon, and Apple, Amazon, and Facebook all fell at least 6%.

But according to a Friday note from UBS, investors should continue to stay invested in technology stocks for the long-term, with a key focus on three emerging technology themes.

Here’s what investors should watch out for over the long term in the technology sector, according to UBS.

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1. 5G enablers and platforms.

Apple’s 5G iPhone lineup should serve as a catalyst for broader 5G adoption, according to UBS.

“The new standard offers as much as 20x faster download speeds and 90% lower latency than 4G, enabling a multitude of emerging technologies over the next decade. 5G enablers will benefit from an anticipated 20x rise in annual 5G capex spending to USD 150bn in 2025, from USD 7.5bn in 2019. 5G platform beneficiaries, like online gaming firms, may harvest even more economic value on the back of widespread, ultra-fast mobile connectivity,” UBS said.

2. China’s digital economy.

As economic tensions rise between the US and China, Chinese internet platforms could thrive as they are better placed to sidestep this tension given that they are less globally integrated and are less reliant on US or third party suppliers, according to UBS. 

“They’ve also benefited from increased digitalization and user gains linked to the pandemic. Within China’s digital economy space, we like select names in e-commerce, food delivery, travel, search, cloud, data centers, fintech and online entertainment platforms,” UBS said.

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3. Tech cyclicals.

As the world emerges from the COVID-19 pandemic, a cyclical recovery will take hold, according to UBS. That’s why investors should consider owning cyclical technology stocks in the semiconductor, memory, and smarthphone supply chain sectors.

“Asia’s smartphone supply chain channels suggest that component production lines are running at or near capacity into 4Q,” UBS said, adding that a pickup in online advertising spend should benefit select mid-cap US internet names.

“So while we still like large cap tech, with valuations appearing fair at current levels given expected earnings growth, to benefit from the next leg higher in markets we think diversifying into other tech segments makes sense,” UBS concluded.

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