What Does 2016 Hold for Tech Stocks?

Tech giants such as Amazon.com, eBay, Apple, Alphabet, and Facebook look well positioned for solid returns going into 2016.

Andrés Cardenal
Andrés Cardenal
Dec 24, 2015 at 1:36PM
Technology and Telecom

The year will soon be over, and stock market returns for 2015 won't look very inspiring. Tech stocks are generally doing better than most other sectors, but the Nasdaq index is still up by only 4% year to date. However, the past is only prologue, and investment decisions need to be based on forward-looking considerations, not past performance. In that spirit, let's look at what what 2016 could bring for investors in sectors such as e-commerce, mobile computing, and online advertising.

Online commerce
Amazon.com (NASDAQ:AMZN) is the undisputed leader in e-commerce, and the company is delivering explosive growth rates. Wall Street analysts are on average expecting $107.2 billion in revenue from the online retail king in 2015, a big 20.5% increase over 2014. For 2016, analysts are forecasting another big year from Amazon, as revenues are expected to rise by 20.8%.

Not only is Amazon delivering staggering growth in e-commerce, but profit margins are also moving in the right direction, and the company is also consolidating its leading position in the promising cloud-computing infrastructure business. In this context, Amazon stock has gained over 120% in the past year alone. The business is firing on all cylinders, but the bar is increasingly getting higher for Amazon. The e-commerce juggernaut will need to deliver truly impressive performance if it's going to continue beating the market in 2016. 


eBay (NASDAQ:EBAY) is a very different story. The company is no match for Amazon when it comes to growth, and management is expecting a modest constant-currency increase in revenue of between 3% and 5% for 2015. For 2016, Wall Street is forecasting that eBay will deliver nearly $9 billion in revenue, growing by 4.6% over 2015.

On the other hand, eBay operates under a remarkably profitable business model. Adjusted operating margins are consistently above 30% of revenue. The stock is also priced at conveniently low levels. eBay trades at a forward price-to-earnings ratio of around 14, a substantial discount versus the average company in the S&P 500 and its forward price-to-earnings ratio above 18. 

Amazon and eBay are two very different investments in e-commerce. Amazon is the poster child for the e-commerce revolution, the business is booming, and expectations are through the roof. eBay is the underdog, but the company is still remarkably profitable, and the stock is attractively priced going into 2016. 

Mobile computing
The smartphone industry is slowing down. Research firm IDC recently reduced its 2015 worldwide smartphone shipments forecast to 1.4 billion units, a 9.8% increase from 2014. Based on this estimation, 2015 will be the first year on record in which global industry growth is below double-digit levels.

This situation is clearly weighing on Apple (NASDAQ:AAPL) stock, as several Wall Street firms have recently reduced their estimates for iPhone sales next year on the back of maturing industry growth. Analysts are on average expecting a 4% increase in revenue from Apple during the fiscal year ending in September 2016, a huge deceleration versus a 28% jump in sales during fiscal 2015.

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As a result, Apple stock has declined by nearly 20% from its highs of the past year, and it looks remarkably cheap at a price-to-earnings ratio below 12. The good news is that expectations are quite undemanding at this stage, and if growth does in fact slow down, it should be no big surprise. On the other hand, if Apple can outperform expectations on the back of sustained growth in the iPhone division and/or better-than-expected numbers in other business segments, then the stock could deliver big gains for investors in 2016.

Digital advertising
Consumers around the world are spending a growing share of their time and attention online, and advertising dollars are moving away from traditional channels toward digital. In a sign of the times, U.S. digital-media advertising is expected to surpass TV ad spending for the first time ever in 2016. For investors looking to capitalize on this trend, Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) and Facebook (NASDAQ:FB) are the way to go.

Alphabet is the global leader in online advertising thanks to the enormous popularity of its services and applications, including the almighty Google Search engine. Across its portfolio of services and applications, Alphabet owns six different platforms with over 1 billion monthly users: Google Search, Android, Maps, YouTube, Chrome, and Google Play.

Sales during the third quarter of 2015 grew 21% on a constant currency basis, and Alphabet produced an adjusted operating margin of 33% of revenue during the period. Considering both growth and profitability, Alphabet looks positioned to continue delivering solid returns for investors in 2016 and beyond.


Facebook is even more explosive than Alphabet when it comes to growth. The social network founded by Mark Zuckerberg has over 1.55 billion monthly users as of the third quarter, and constant currency sales jumped by a staggering 51% year over year. Analysts calculate that Facebook will report nearly $24 billion in revenue during 2016, a 37.8% annual increase.

This kind of growth doesn't come cheap. Facebook carries a forward price-to-earnings ratio of around 36 times earnings forecasts for 2016. While this is clearly a demanding valuation, it's not necessarily unreasonable for such a powerful growth business.