The “Magnificent Seven” has now replaced “FAMANGs” as the nickname for current market leadership. It is also a somewhat deridingly used term for the “overpriced” stocks hated by value managers. Holdovers include Apple, Amazon, Microsoft and Google. Gone is Netflix. New are Nvidia and Tesla while Facebook had a facelift to be renamed Meta. As tech has long been associated with leading growth, the nature of what constitutes tech will remain important in the future. The tech that will be commoditized and replaced is yet to be determined. Ask former owners of Digital Equipment Corporation, Cisco Systems and Hewlett Packard how quickly a tech company’s leadership can fall from grace as new technologies take over. From a growth manager’s perspective, the goal is to own the future Magnificent Seven, not the current one.
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To delve into potential candidates for future magnificent seven type lists, this article examines three popular emerging technology ETFs, each targeting different investible universes.
The ETFs, listed by ticker symbol, include:
ARKW – ARK Next Generation Internet ETF. ARKW is an actively-managed exchange-traded fund (“ETF”) that will invest under normal circumstances primarily (at least 80% of its assets) in domestic and foreign equity securities of companies that are relevant to the fund’s investment theme of next generation internet. The fund’s managers are tasked with identifying companies they see as the next generation of Internet evolution. Investors need to be aware that many of the companies developing these advancements are huge corporations for which nascent technologies are only a small fraction of total revenues. Ark ETFs hold high-conviction portfolios. As such, most ARK ETFs have fewer than 40 individual securities.
PSCT – Invesco Small-Cap Information Technology ETF. PSCT tracks a market-cap-weighted index of US small-cap emerging technology companies, especially internet services, infrastructure, electronics, semiconductors, software, and communication technologies. The S&P 600 Small Cap Index, not the FTSE-Russell 2000, is used as the investable universe for selection.
EMQQ – ETC Emerging Markets Internet and Technology ETF. EMQQ tracks a cap-weighted index of companies producing most of their revenue from internet or e commerce activity in emerging markets. The index includes common stocks trading on non-US exchanges, ADRs and GDRs. The index-based fund targets firms engaged in internet service, retail, broadcasting and media, and online advertising, gaming, travel, search engines and social networks. Firms must derive most of their revenue or assets in these industries in emerging markets to make the cut.
The benchmark ETFs chosen for this portion of the review are:
XLK – Select Sector SPDR Technology Index ETF – XLK tracks an index of S&P 500 technology stocks. As such it is narrower than the Nasdaq-100.
QQQ – Invesco QQQ Trust ETF – QQQ is an exchange-traded fund based on the Nasdaq-100 Index®.
231129 blog chart graphic
Observations:
- ARKW, ARK Next Generation Internet ETF, is rated highest by ValuEngine for year-ahead projected performance with our highest rating of 5 (Strong Buy). It earns our highest projection for year-ahead price gain. ARKW has thrived during the past 12 months as evidenced by a 32.33% price gain. It beat all of the ETFs in this study, including the benchmark ETFs, for the past 3- and 6-month periods.
- PSCT also merits a Buy rating of 4, albeit not a strong buy (5). Surprisingly, in a very tough 5-year market for small-cap stocks, PSCT has been a strong performer. Its .1% 5-year return easily beat ARKW and EMQQ and was competitive with XLK and QQQ. Another surprise, given that PSCT targets generally more volatile small cap stocks, is that it has the lowest price volatility of the ETFs in the study. A further sign of risk reduction is that PSCT is the least top-heavy in concentration with its #1 holding, Rambus Inc., accounting for less than 6% of the ETF’s overall capitalization. The bottom line is that this ETF has been a formidable performer in a tough environment for its investible small-cap universe.
- EMQQ is not included in the ValuEngine ETF Universe because most of its stocks and GDRs (Global Depository Receipts, principally traded on the London Stock Exchange) trade on non-US exchanges. Most of its holdings, however, have US ADRs that are covered by ValuEngine. A number of its largest holdings are emerging internet and tech stocks in emerging markets that fit the theme of this article especially well. The data used for EMQQ are from ETF Database and Yahoo Finance. At nearly half a billion dollars, EMQQ has been one of the most successful ETFs offered by a small and independent ETF sponsor focusing on non-US equities in terms of assets under management.
- QQQ performance dominance during the past 5 years is well-known and has been featured in this blog many times. What is less well-known is that XLK, the Technology Select Sector SPDR fund, has had even greater gains and more dominance in the equity benchmark ETF space. In fact, XLK outgained QQQ in five of the six periods shown in the chart. The insights on why this has been true in a market dominated by less than a dozen leaders become evident when reading the index methodologies and the ETF statistical tables. XLK is more concentrated and owns all of the “magnificent seven” positions with a higher average market capitalization. Higher concentrations in fewer stocks usually means assuming higher levels of risk. When that concentration significantly outperforms, the results are terrific. Just be aware that there are two sides to that coin. Another point in XLK’s favor is that its expense ratio is 50% less than that of QQQ, 0.10% as compared with 0.20%.
Current ValuEngine reports on these stocks or ETFS can be viewed HERE
Analyzing ETFs in areas of opportunity can serve purposes beyond investing in and/or trading these ETFs themselves. One major purpose is to identify the stocks in which they invest for potential investment and trading opportunities. For this article, we focused on the top ten holdings in each ETF that was rated 4 (Buy) or 5 (Strong Buy) from ValuEngine.
Comparing Stocks from these ETFs Included in this Analysis
Seven stocks were chosen for this analysis.
ACLS – Axcelis Technologies, Inc. designs, manufactures, and services ion implantation and other processing equipment used in the fabrication of semiconductor chips in the United States, Europe, and Asia Pacific. Axcelis Technologies, Inc. was founded in 1978 and is headquartered in Beverly, Massachusetts. (Selected from PSCT)
BIDU – Baidu, Inc., formerly Baidu.com, Inc. is a Chinese-language Internet search provider. The company operates through Baidu Core and iQIYI segments. The company offers Baidu App to access search, feed, and other services using mobile devices; Baidu Search to access its search and other services; Baidu Feed that provides users with personalized timeline based on their demographics and interests. The company was formerly known as Baidu.com, Inc. Baidu, Inc. was incorporated in 2000 and is headquartered in Beijing, China. (Selected from EMQQ)
MELI – MercadoLibre, Inc. is one of the largest e-commerce platforms in Latin America. The company offers six integrated e-commerce services including Marketplace and Classifieds. The company was incorporated in 1999 and is headquartered in Montevideo, Uruguay. It operates Mercado Libre Marketplace, an automated online commerce platform that enables businesses, merchants, and individuals to list merchandise and conduct sales and purchases online; and Mercado Pago FinTech platform, a financial technology solution platform. The company was incorporated in 1999 and is headquartered in Montevideo, Uruguay. (Selected from EMQQ)
ROKU – Roku is the leading TV streaming platform provider in the United States based on hours streamed attributed to the sale. The company operates in two segments, Platform and Devices. Its streaming platform allows users to find and access TV shows, movies, news, sports, and others. The company also provides digital advertising and related services. Roku, Inc. was incorporated in 2002 and is headquartered in San Jose, California. (Selected from ARKW).
TCEHY – Tencent Holdings Limited, an investment holding company, offers value-added services (VAS), online advertising, fintech, and business services in the People’s Republic of China and internationally. It operates through VAS, Online Advertising, FinTech and Business Services segments. The company was founded in 1998 and is headquartered in Shenzhen, the People’s Republic of China. (Selected from EMQQ)
TSLA – Tesla Inc., Tesla, Inc. designs, develops, manufactures, leases, and sells electric vehicles, and energy generation and storage systems in the United States, China, and internationally. It operates in two segments, Automotive, and Energy Generation and Storage. Tesla, Inc. was incorporated in 2003 and is headquartered in Austin, Texas. (Selected from ARKW)
TWLO – Twilio Inc., together with its subsidiaries, provides software and communications solutions in the United States and internationally. The company operates a cloud communications platform that enables developers to build, scale, and operate customer engagement within software applications. Its customer engagement platform provides a set of application programming interfaces that enable developers to embed voice, messaging, and email interactions into their customer-facing applications. Twilio Inc. was incorporated in 2008 and is headquartered in San Francisco, California. (Selected from ARKW)
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| ACLS | BIDU | MELI | ROKU | TCEHY | TSLA | TWLO | QQQ | |
| Stock Name | Axcelis Tech | Baidu Inc. | Mercadolibre Inc | Roku Inc. | Tencent Holding | Tesla Inc | Twilio Inc | Invesco QQQ Trust |
| Market Cap, (Bllns.) | 4.5 | 37.8 | 73.6 | 13.5 | 392.8 | 706.3 | 11.2 | 194.69* |
| ValuEngine Rating | 5 | 5 | 4 | 4 | 4 | 4 | 5 | 4 |
| VE Forecast 3-mo. Price Return | 1.45% | 3.64% | 5.28% | 5.39% | 3.36% | 4.27% | 4.59% | 2.97% |
| VE Forecast 1-yr. Price Return | 17.62% | 13.91% | 6.23% | 7.88% | 4.84% | 8.19% | 12.38% | 0.53% |
| Last mo. Price Return | -16.45% | -12.51% | 19.85% | 33.28% | 4.95% | -8.01% | 7.34% | 3.60% |
| Last 3 mo. Price Return | -17.70% | -16.30% | 17.81% | 11.03% | 1.21% | 3.54% | 1.99% | -1.63% |
| Last 6 mo. Price Return | 4.86% | -17.63% | 15.22% | 71.36% | -6.34% | 40.28% | 29.96% | 15.89% |
| Historic 1-Yr. Price Return | 83.13% | 15.35% | 51.06% | 57.35% | 5.60% | 24.97% | 21.14% | 41.16% |
| Historic 5-Yr Ann. Price Return | 39.99% | -11.87% | 26.82% | 1.38% | 1.50% | 43.79% | -7.70% | 14.51% |
| Volatility | 52.3% | 50.8% | 48.0% | 74.8% | 37.7% | 69.5% | 57.4% | 22.1% |
| Sharpe Ratio | 0.77 | -0.23 | 0.56 | 0.02 | 0.04 | 0.63 | -0.13 | 0.66 |
| Beta | 1.78 | 0.71 | 1.49 | 1.71 | 0.31 | 2.06 | 1.32 | 1.09 |
| Undervaluation Percentile | 64 | 80 | 64 | 91 | 69 | 46 | 83 | 33%* |
| P/B Ratio | 5.6 | 1.3 | 28.7 | 6.1 | 3.3 | 13.8 | 2.8 | 7.2 |
| P/E Ratio | 19.3 | 14.3 | 70.8 | N/A | 22.8 | 78.8 | N/A | 30.4 |
| P/S Ratio | 4.1 | 2.1 | 5.6 | 3.4 | 4.7 | 7.7 | 2.7 | 4.4 |
| PEG Ratio | 2.9 | 0.5 | 1.4 | 0.3 | 0.7 | 4.2 | 0.8 | 23.7 |
| EPS Growth | 6.7% | 17.4% | 50.2% | 56.4% | 33.2% | 18.7% | 49.8% | 36.3% |
| Div. Yield | 0.00% | 0.00% | 0.01% | 0.00% | 0.65% | 0.00% | 0.00% | 0.59% |
| * Averages used for ETFs |
Current ValuEngine reports on these stocks or ETFS can be viewed HERE
Analysis of Featured Stocks
- 3 of the 7 highlighted companies are among the top 10 holdings of ARKW, ARK Next Generation Internet ETF. Another 3 come from EMQQ, Emerging Markets Internet and e-Commerce ETF. Only one of the top 10 holdings of Invesco Small Cap Technology ETF PSCT was rated a buy by ValuEngine. That stock is ACLS, Axcelis Technologies. It gets a 5 (Strong Buy) Rating and gets our highest projected 12-month price change, 17.6%. If that works out, it would be quite a run for ACLS since it also posted the highest price gains in the previous 12 months, a whopping 83%. Its 5-year annualized return of nearly 40% while just shy of the 43+% posted by TSLA in the study still ranks it near the very top of its industry group.
- Of the three emerging market stocks in the study, Baidu Inc. (BIDU) is the highest rated for year-ahead performance with a price gain forecast of nearly 14%. It gained 15% in the prior 12 months. It has not done as well in the five-year time horizon, losing more than 11% on an annualized basis. Despite recent gains, it is #1 or #2 among the 7 stocks in our survey in all traditional valuation metrics.
- Uruguay’s MercadoLibre Inc. (MELI) is projected to “only” gain 6% in the next 12 months, but its historical performance has been consistently outstanding. It had the top three-month return among the seven stocks and was in the top 3 in all the other historical return categories.
- At the opposite end of the spectrum for our septet, Shenzhen-based Tencent Inc. (TCEHY) has the lowest year-ahead price gain prediction at just a bit over 4.2%. Let’s point out that this is still an excellent number and greater than the projected year-ahead price-gain number for more than 75% of the stocks we cover. At the same time, it has had by far the most consistent earnings-per-share streams. TCEHY also has the lowest price volatility and pairs that with a Beta of just 0.31. With very modest valuations and as the only dividend paying stock in the study, its profile seems like a cross between that of growth stock and a utility. Some investors may find this an attractive combination and use this identification as a stepping stone to engage in further research.
- Please bear in mind that owning the US Exchange-listed American Depository Receipts (ADRs) of foreign stocks carries foreign currency risk. The stock might increase 20% in a given year but if its currency falls 50% relative to the US dollar, a US-based investor will lose money. This is why many advisors counsel investors who do not understand how ADRs work to avoid including them in the portfolio. For the more sophisticated investor who grasps these concepts, then ADRs make sense as part of the total opportunity set.
- The remaining three stocks, Roku (ROKU), Tesla (TSLA) and Twilio (TWLO) are all held by ARKW, ARK Next Generation Internet ETF. Despite the fact that it has posted strong price gains in two recent periods, our valuation model has ROKU among the 9% of companies we cover most undervalued in current price. By traditional valuation metrics, TCEHY and BIDU are much more modestly valued. ROKU is also the most volatile stock in the sample. The Tesla (TSLA) story is well-known but the company itself keeps growing in layers of complexity. TSLA stock has a long history of strong price gains. Our predictive model expects that to continue. Our valuation model rates the stock as slightly overvalued, the only such stock among these seven. With a Beta above 2.00, huge price volatility is one of its calling cards. As should be obvious from the Market Cap row in the data table, the mega-cap auto company is the only “Magnificent Seven” stock included in this analysis.
- Twilio Inc. (TWLO) is far more typical of the type of stock that the ARKW management team prefers to buy and hold. With a market cap of just over 11 billion, a differentiated technology offering and strong earnings growth projections, TWLO is the type of under-the-radar stock that the asset management company made its reputation on by spotting ahead of the curve. It has a strong track record during the past 12 months and gets a Buy rating from ValuEngine. Its comparative valuation statistics make it appear relatively undervalued compared to other emerging internet and related technology providers. However, it is still highly volatile with many beneath-the-surface risks that must be addressed when considering how appropriate TWLO might be as an addition to a given portfolio.
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Summary
The good news for investors looking to invest in the future of emerging internet stocks is that the timing may be propitious. 3 of VE’s 4 Internet industry group reports (Internet Commerce, Services and Software) boast above-average ratings and a number of buy-rated stocks to choose from. In contrast, the final internet industry we cover, Internet Content is rated average.
In this article, we highlight ARKW, PSCT and EMQQ. For year-ahead performance, our predictive model loves actively managed ARKW to continue its rebound from shortcomings in 2021 and 2022 and to outperform for another 12 months. ARKW is rated 5 (Strong Buy). The ValuEngine valuation model agrees on a bottom-up basis as nearly 70% of stocks it currently owns are undervalued. Three buy-rated stocks from ARKW made this analysis. Investors should be aware that as an actively managed ETF, the constituents of ARKW are subject to change and with them the statistical profile of the ETF.
Those looking for emerging small cap ETFs might find buy-rated PSCT as a fertile hunting ground for such stocks. This fund has been chugging along, generating competitive returns. Although only one of its top ten holdings was rated a 5, the focus on small-cap provides potential for higher returns over longer periods of time. Growth-oriented investors may also find the ETF fertile ground for identifying stocks to investigate further.
Of the seven individual buy-rated stocks we profiled, Tesla is the largest but also has relatively high valuations and has had very volatile price swings. Baidu (BIDU) and Tencent have provided more stability and are still at relatively attractive valuations. However, currency exchange-rate fluctuations between the dollar and Yuan must be considered. Small-cap Axcelis (ACLS) gets our highest forecast return and could be deployed as a buy-and-hold stock or as a trading vehicle. Twilio Inc. (TWLO) also appears to be well positioned for potential growth. The bottom line is that these Emerging Internet ETFs and our profiled stocks offer above average growth potential according to our models but with generally above-average risks and very little dividend income.
Since timing is everything and the holidays approach, we wish you a propitious holiday and hearty investment returns in the months ahead.
_______________________________________________________________
By Herbert Blank
Senior Quantitative Analyst, ValuEngine Inc
www.ValuEngine.com
support@ValuEngine.com
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