Technology ETFs hit a glitch Thursday following software and cloud-computing giantOracle's ( ORCL ) dour profit report.
Technology Select Sector SPDR ( XLK ), tracking technology firms in the S&P 500 index, tumbled 1.13% to 29.98.
Other ETFs with major stakes in Oracle --Vanguard Information Technology ( VGT ), iShares S&P North American Technology-Multimedia Networking Index ( IGN ),First Trust ISE Cloud Computing Index ( SKYY ) andPowerShares QQQ (QQQ), tracking the largest 100 nonfinancial stocks on the Nasdaq -- fell 1% to 1.5%.
Oracle shares dove 10% after reporting fiscal third-quarter earnings rose 5% -- the slowest rate in three years. Sales slipped 1% year over year to $9 billion.
A flurry of analysts cut their price targets and downgraded shares. But Credit Suisse rated the company outperform and recommended buying on weakness, noting shares trade at 11.5 times forward estimates, which is lower than its historical average and the market.
"Wall Street underappreciates how disruptive a force Oracle's engineered systems strategy could be in the network and storage hardware markets," Credit Suisse analysts wrote. They also noted Oracle is adding new services and products and is benefiting from healthy corporate spending to upgrade its systems.
"Something more secular is occurring as cloud computing increasingly entices CIOs to refresh their legacy IT systems with cloud services rather than infrastructure," Brian Schwartz, an analyst with Oppenheimer wrote. He also rated Oracle outperform.
XLK, the most widely traded tech ETF, returned 4.09% year to date vs. 8.64% for the SPDR S&P 500 (SPY). XLK is flat on a one-year basis while SPY returned 10.38%.
Although XLK surpassed its 2007 high a year before the broader market, it's been lagging ever since. It failed to reach a new 52-week high while the SPY hit a six-year peak. This suggests XLK could be a "reversion to the mean" or "catch up" play, in which institutional investors buy lagging sectors to take advantage of low prices and sell winning sectors on the belief they're overpriced.
The S&P 500's tech sector currently trades at 12.7 times 2013 earnings estimates with a 1.0 price-to-growth ratio -- a discount compared to the S&P. The broader index trades at 14 times forward earnings with a 1.3 PEG ratio. However, tech companies are forecast to grow earnings 6.5% year over year in 2013, while the S&P 500 lifts earnings 7.5%.
Growth A Challenge
"A lot of companies are quite mature at this point and so growth has become more of a challenge and the economic backdrop is not stimulating demand at this point," said Scott Kessler, head of tech sector equity research at S&P Capital IQ.
Tech firms make most of their money overseas and have been hurt by weak demand in Europe and a depreciating euro, he added.
Once the market regains its footing, the tech sector will lead the next growth cycle and the market higher, says Ronald Lang, principal at Philadelphia-based Atlas Wealth Management.
Companies have been slow to replace older technology and will increase capital spending to upgrade their systems, he added.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
