The New Tech Names to Watch!

Investing trends and insight from Zacks Advantage, the actively managed, performance-driven robo advisor for the savvy investor. FAANG Get Crushed – What are the New Tech Names to Watch? Perhaps it should not come as much of a surprise that the darlings of the tech world, i.e. the FAANG stocks, are getting pummeled harder than the broader market during this ongoing market correction. In our view a general – and good – rule of thumb is that what goes up the most during a bull run is also prone to getting hit the hardest on the way down, and it appears that we’re seeing it now. But there are other reasons to think that the profound run for FAANG stocks may retreat back to earth and ‘normalize’ going forward, as the biggest tech players face the stiff three-pronged headwinds of government regulation, new taxes, and public revolt. We’ll take a look at each headwind below, but we’ll also make the case for renewed optimism in the sector, based on a few exciting and rapidly growing companies set to IPO in 2019. --------------------------------------------------------------- [Give Yourself Every Investing Advantage]( At Zacks Advantage, we believe knowledge is an investor’s greatest advantage. Our comprehensive Savvy Investors Guide provides investing insight that we think will help you make better investing choices. 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Abroad, Europe has taken an even harder line on tech companies, underscored by the EU’s General Data Protection Regulation, which took effect in May and imposes strict requirements and stiff fines on tech companies who violate user privacy rules. Google and Facebook have already been delivered big penalties for such violations. To date, no sweeping regulation has hit U.S. shores, and for now it’s been mostly limited to dress-downs by lawmakers. Even still, tech companies themselves agree that better regulations are needed – they just hope they can play a role in writing them. 2 Tech Headwind #2: Taxes The massive U.S. corporate tax cut came at a good time for FAANG companies, as globally there is currently a movement to create new ‘digital taxes’ that target FAANG companies in particular – but also other technology companies that are headquartered in the U.S. but generate revenues from users abroad. The UK has taken the bold and unprecedented first step of rolling out a “first-of-its-kind” tax, designed to capture locally generated revenue. The Wall Street Journal calls it “the most concrete attempt yet by an industrialized nation to rewrite the world’s tax code for the digital era.” The most immediate effect of the UK tax may be the pressure it puts on countries to finalize a truly unified global agreement. This includes the United States. Meanwhile, the European Union continues to develop a three percent revenue tax for tech companies in member nations; South Korea, India and at least seven other Asian-Pacific countries are looking at their own version of a tax, while Mexico, Chile and other Latin American nations are poised to follow suit. These taxes matter to investors because FAANG earnings may feel a direct impact from their implementation, particularly if other countries move to follow suit creating a global tax liability for tech companies that didn’t exist before. 3 Tech Headwind #3: Public Revolt With every New York Times investigation revealing how technology companies are actually using, tracking, and monetizing user data, there appears to be an increasing outcry from the public to rein in these practices. In a sense, it’s been on ongoing PR nightmare for these companies, which only stands to worsen as public awareness rises over time. To the extent that this results in a slower growth rate for new users, lower user engagement, fewer site visits, and an increasing number of users actually controlling and limiting data sharing, technology companies could feel a direct impact on earnings growth. Thinking Outside the FAANG Box: New Tech Names We Think You Should Watch It’s not all cautious news in the tech sector. As the spotlight focuses on the biggest players (FAANG), it could afford investors the opportunity to consider the next wave of public companies in line to become the new darlings of Wall Street. A few names set to IPO in 2019 are noteworthy and economically impactful companies like Uber, Lyft, Pinterest, and Slack. Investors don’t have access to these companies yet, but investment bankers and advisers are lining up and posturing to lead the IPOs. Morgan Stanley notably beat out Goldman Sachs to lead the coveted Uber IPO, which somewhat caught investors by surprise when the Wall St. Journal reported that Uber and Lyft filed paperwork confidentially with the Securities and Exchange Commission. Pinterest is another company that has grabbed investor attention, as they recently surpassed more than 250 million monthly active users and nearly $1 billion in ad revenue – a 50% growth rate. To date in this bull market, the IPO market has arguably been generous to fast-growing tech companies – even the ones that lose money. According to Dealogic, tech IPOs have averaged a roughly 4.3% return this year, as broader indices have declined. Dealogic shows that 55 technology companies have IPO’d on US exchanges this year, raising $20.9 billion – which is more than technology companies had raised for the full years in 2015, 2016 and 2017. 4 Bottom Line for Investors 2018 might be best remembered as the year when the biggest names in technology were humbled by investors and had their reputations questioned by the public. 2019 might be the year when disdain actually takes the form of new legislation, regulation, and taxes. How this new landscape affects forward earnings will be the fundamental question for investors. At Zacks Advantage, we believe in innovation. 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