The broader stock market has done well so far this year, as the S&P 500's double-digit gains indicate, but the same cannot be said about the technology sector that has been hit by a couple of strong bouts of volatility in 2021.
The Nasdaq-100 Technology Sector index has given up nearly all its gains in the past month. The fear of rising inflation, stretched valuations, the return to normalcy in a post-pandemic world, and rising Treasury yields have led investors to pull the plug on tech stocks this year following a terrific performance in 2020.
But investors on the hunt for long-term growth shouldn't get discouraged by the tech sell-off. I believe it would be good to use the decline in tech stocks as a buying opportunity. Here are a few reasons why.
1. Hot trends will help tech stocks outperform
Tech stocks tend to outperform the broader market over long periods. The Nasdaq-100 Technology Sector has outperformed the S&P 500 and the Dow Jones Industrial Average handsomely over several years.
This is not surprising as companies operating in the technology space can create disruptive products and services that can give birth to entirely new market and revenue opportunities. Additionally, several hot trends could fuel long-term upside in tech stocks.
The arrival of fifth-generation (5G) wireless networks, for instance, has supercharged companies such as Apple (NASDAQ:AAPL) that were earlier struggling to find growth. Apple's annual iPhone sales hit a peak back in 2015, after which the company's shipments plateaued and eventually declined. But its fortunes have now changed. The 5G-enabled iPhone 12 has given Apple's customers a solid reason to upgrade and sent the company to the top of the smartphone sales rankings.
Apple now commands 30% of the 5G smartphone market and is expected to set new sales records this year. What's more, the 5G smartphone market is expected to grow five times by 2025 as compared to last year, paving the way for long-term growth at Apple. Not surprisingly, Apple's projected earnings growth of 18% a year for the next five years is more than double what it has clocked in the past five years.
Meanwhile, new technology trends such as autonomous and connected cars create an entirely new revenue stream for companies that are already enjoying remarkable growth in their core businesses. NVIDIA (NASDAQ:NVDA) and Skyworks Solutions (NASDAQ:SWKS) are two such companies that stand to gain big from the automotive market.
NVIDIA's automotive revenue is currently just a speck of its overall business, generating $536 million in revenue last fiscal year and accounting for just 3% of total sales. But the graphics specialist has pointed out that it has scored $8 billion worth of design wins in the automotive space thanks to its driving platforms that can help vehicles achieve full autonomy. NVIDIA expects this opportunity to bear fruit over the next six fiscal years, though its product development moves and huge partner ecosystem could drive bigger gains.
Meanwhile, connected cars are opening a massive diversification opportunity for Skyworks Solutions -- a company that relies on Apple for a huge chunk of sales. Skyworks has been shipping its wireless chips to several automakers and component suppliers. It is now on track to take this business up several notches after a $2.75 billion deal to acquire the infrastructure and automotive business of Silicon Laboratories. Skyworks estimates the acquisition will boost its addressable market by $20 billion a year, which could give the company's already booming business a new set of wings over the coming years.
2. The pandemic has given tech companies a lasting boost
It was feared that the substantial sales growth that tech companies enjoyed last year during the coronavirus pandemic would wane in 2021, but that's not the case. Online pet retailer Chewy (NYSE:CHWY) has debunked that myth, indicating that tech trends that got a shot in the arm last year are here to stay.
Chewy registered 47% revenue growth in fiscal 2020 to $7.15 billion and cornered around 60% of online sales of pet products and supplies. It anticipates around 25% revenue growth in fiscal 2021, but the end-market opportunity indicates it can do much better and keep growing at elevated levels for a long time to come. That's not surprising as the online channel is just 30% of the entire pet retail market that's expected to reach $110 billion in revenue this year, according to the American Pet Products Association (APPA).
Chewy expects online sales to account for more than half of the overall market by 2025. It stands to win big from this growth thanks to the addition of a durable and permanent customer base during last year's COVID-19 outbreak that's expected to keep purchasing pet supplies online.
Cloud communications specialist Twilio (NYSE:TWLO) is enjoying similar tailwinds. The shift to remote work and online education led to a big jump in sales last year as companies accelerated their transition to cloud-based contact centers. Twilio finished 2020 with 55% revenue growth, and it is enjoying similarly strong momentum in 2021. It delivered 62% revenue growth in Q1 and expects around 50% year over year top-line jump this quarter thanks to a fast-growing customer base and an increase in spending by existing customers.
Given that the cloud-based contact center market is expected to clock nearly 26% annual growth through 2025 and hit $36 billion in revenue from just $11.5 billion last year, Twilio's days of high growth are here to stay.
3. Great tech stocks are available at cheap multiples
One of the reasons why investors have sold off tech stocks this year is because of their rich valuations, but the good news is that many high-growth companies look like great bargains. The Nasdaq-100's price-to-earnings (P/E) ratio of nearly 36 has retreated from December 2020 levels of almost 40, but a closer look indicates that some top names are undervalued when compared to the tech sector.
Apple, for instance, has a trailing P/E ratio of just 28 despite stepping on the gas from a valuation standpoint. The stock was averaging a P/E ratio of over 40 last year. Similarly, high-flying chipmaker Advanced Micro Devices (NASDAQ:AMD) is trading at just 31 times trailing earnings as compared to last year's average multiple of 124. The chipmaker is firing on multiple cylinders such as gaming, data centers, and gaming consoles. The company has also raised its full-year revenue growth guidance to 50% from the earlier expectation of 37%, making AMD a solid bargain given its growth.
Investors can find some great tech stocks that trade at attractive valuations right now and can grow at impressive rates for a long time to come. All of this tells us why the recent sell-off in tech isn't such a bad thing after all, as savvy investors can use the pullback to add some top picks to their portfolios.