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Hedge Funds’ Top Tech Bets: Did They Get Them Right in Q1?

The technology sector has slightly underperformed broader market benchmarks thus far in 2016, with the S&P North American Technology Sector Index returning 0.24% year-to-date. This compares to the return of 1.09% generated by the S&P 500 Index over the same time span. The technology sector appears to have been relatively strong during the broader market sell-off earlier this year despite enduring heavy profit-taking on the part of investors amid increased worries about the strength of the U.S economy. Some analysts believe that the information technology sector will experience a new wave of mergers and acquisitions that might improve performance by reducing competition and consolidating expenses. It is also important to note that tech companies have been increasing dividend payments in recent years, which might serve as another reason for investing in this promising corner of the U.S equity market. As the labor market continues to tighten and wages continue to increase, U.S consumers may be more willing to spend on technology, which would give the technology sector two main pillars of growth: business and the consumer. Having this in mind, the following article will lay out the five most-favored technology stocks among the hedge funds tracked by Insider Monkey as of the end of 2015, as well as discuss the performance of those stocks in the first quarter of 2016.

At Insider Monkey, we track around 785 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details about our small-cap strategy).

#5 Apple Inc. (NASDAQ:AAPL)

– Investors with Long Positions (as of December 31): 133

– Aggregate Value of Investors’ Holdings (as of December 31): $17.72 Billion

– Q1 Return: 4.1%

The number of hedge funds in our system with stakes in Apple Inc. (NASDAQ:AAPL) remained unchanged during the fourth quarter of 2015, with 133 funds amassing 3% of the company’s outstanding common stock. The shares of the iPhone maker gained 4.1% in the first quarter and Apple continues to play a massive role in the portfolios of both retail and large-scale investors favoring a buy-and-hold strategy. Earlier this week, Credit Suisse analyst Kulbinder Garcha reiterated his ‘Outperform’ rating on Apple and raised his price target on it to $150 from $140, saying that the services businesses of the widely-loved company represent “an underappreciated driver” for growth. The analyst anticipates that Apple’s services businesses, which include the iTunes Store, Apple Music, Apple Pay, and others, could make up 29% of the company’s gross profit by the end of 2020, compared to a current share of 15%. The Credit Suisse analyst believes that the growth within Apple’s services businesses will be propelled by the fast-increasing installed base of devices, increasing services spending per user, as well as various service opportunities for growth in the TV and video market. Although Apple’s freshly-released iPhone SE is believed to offer a lower gross profit margin than the rest of the iPhone family, the iPhone SE is anticipated to add $6.8 billion to the company’s top-line figure for the current calendar year and $0.23 in earnings per share. Carl Icahn’s Icahn Capital LP holds an ownership stake of 45.76 million shares in Apple Inc. (NASDAQ:AAPL) as of the end of the December quarter.

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Head to the following two pages to see a performance breakdown of the four most popular tech stocks among top investors.

#4 Microsoft Corporation (NASDAQ:MSFT)

– Investors with Long Positions (as of December 31): 140

– Aggregate Value of Investors’ Holdings (as of December 31): $23.42 Billion

– Q1 Return: 0.3%

Hedge fund sentiment towards Microsoft Corporation (NASDAQ:MSFT) increased significantly in the final quarter of 2015, with the number of funds tracked by Insider Monkey long the stock climbing to 140 from 113 quarter-over-quarter. Similarly, the value of their stakes in Microsoft grew to $23.42 billion from $19.31 billion. The shares of the technology giant are up by 33% in the past 12 months, though they are flat thus far in 2016. Microsoft’s revenue for the six months that ended December 31 totaled $44.18 billion, down from $49.67 billion reported for the same period of the prior year. The decline in the company’s top-line figure was mainly driven by the impact of a net revenue deferral related to Windows 10, as well as foreign currency headwinds. Intelligent Cloud revenue for the six months that ended December 31, which accounted for approximately 28% of total revenue, increased by 6% year-over-year to $12.23 billion. Server products and cloud services revenue grew by $423 million year-over-year, primarily due to revenue growth of 124% from Microsoft Azure. Recent reports reveal that Microsoft’s Azure cloud business continues to add business customers and developer subscribers at a high rate, with 120,000 new subscriptions to Azure being added each month. Amazon’s Amazon Web Services (AWS) continues to dominate the cloud space, but Microsoft’s Azure has been consistently gaining market share. Jeffrey Ubben’s ValueAct Capital reported owning 56.62 million shares of Microsoft Corporation (NASDAQ:MSFT) through the round of 13F filings for the December quarter.

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#3 Amazon.com Inc. (NASDAQ:AMZN)

– Investors with Long Positions (as of December 31): 141

– Aggregate Value of Investors’ Holdings (as of December 31): $17.32 Billion

– Q1 Return: -12.17%

Amazon.com Inc. (NASDAQ:AMZN) also received more attention from the hedge fund industry during the fourth quarter of 2015, as the number of funds with stakes in the company increased to 141 from 113, while the value of those stakes climbed to $17.32 billion from $14.98 billion quarter-over-quarter. The tech-driven retailer has seen its market value drop by 12% since the beginning of 2016, which may represent an expected correction after it was one of the top performing stocks of 2015. Earlier this week, Robert Peck, an analyst at SunTrust Robinson Humphrey, reiterated his ‘Neutral’ rating on Amazon.com while stating that the company’s AWS is worth over $100 billion. The analyst has a price target of $600 on the stock. Recent estimates show that Public IT cloud services revenue will cross the $140 billion mark in 2019, increasing from approximately $70 billion in 2015. Meanwhile, the market for Infrastructure-as-a-Service (IaaS) and Platform-as-a-Service (PaaS) offerings is estimated to reach $50 billion by 2019 from roughly $20 billion in 2015. Mr. Peck believes that Amazon.com will be able to maintain its dominant position in the cloud space, arguing that the company needs to opt for price cuts to retain subscribers and grow its customer base. The analyst suggests that possible price cuts will reduce the likelihood of seeing some customers switching to competing services from Microsoft and Google. Stephen Mandel’s Lone Pine Capital upped its stake in Amazon.com Inc. (NASDAQ:AMZN) by 14% during the December quarter, ending 2015 with 2.21 million shares.

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#2 Facebook Inc. (NASDAQ:FB)

– Investors with Long Positions (as of December 31): 146

– Aggregate Value of Investors’ Holdings (as of December 31): $10.80 Billion

– Q1 Return: 9.0%

There were 146 money managers in our database with long positions in Facebook Inc. (NASDAQ:FB) at the end of December, up from 128 at the end of the third quarter. The aggregate value of those funds’ positions rose to $10.80 billion from $8.96 billion quarter-over-quarter. Facebook’s market capitalization has gained 36% in the past 52 weeks, benefiting from smart acquisitions, including that of the popular photo-sharing mobile application Instagram. The photo-sharing app, purchased for around $1 billion in cash and stock, did not introduce advertising to businesses until September 2015, which makes investors believe that Instagram will be a promising growth business for its parent company. It is estimated that Instagram’s mobile ad revenue accounted for 3.7% of Facebook’s total ad sales in 2015. Nonetheless, the photo-sharing application is projected to generate $2.81 billion in ad revenue by 2017, which would constitute 10.6% of the company’s ad sales. Credit Suisse analysts are even more bullish on the underlying potential of Instagram, recently saying that the app will be a $5.3 billion business by 2017. The social network may also experience a massive revenue boost from its Oculus virtual reality technology and content platform. The highly-successful monetization efforts of Instagram may offer Facebook plenty of time to develop monetization opportunities for its WhatsApp and Facebook Messenger platforms. Philippe Laffont’s Coatue Management owns 6.61 million shares of Facebook Inc. (NASDAQ:FB) as of the end of 2015.

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#1 Alphabet Inc. (NASDAQ:GOOG)

– Investors with Long Positions (as of December 31): 154

– Aggregate Value of Investors’ Holdings (as of December 31): $15.10 Billion

– Q1 Return: -1.9%

Alphabet Inc. (NASDAQ:GOOG) was the second-most popular company among the hedge funds tracked by Insider Monkey as of the end of December, and the most popular tech stock, with 154 funds owning Alphabet’s Class A shares and 142 money managers owning its Class C shares. Those figures both represented large increases quarter-over-quarter, from 129 and 119 hedge funds in its Class A and C shares, respectively. It is widely known that Alphabet’s core business involves selling online advertising space, but the much-loved tech giant also has a promising portfolio of high-potential projects such as Fiber, Calico, Nest, and X, to name just a few. Alphabet’s top-line results have been growing at a steady pace for the past several years, as have the company’s bottom-line figures. Alphabet’s revenue for 2015 totaled $74.99 billion, up from $66.00 billion in 2014. Net income reached $16.35 billion in 2015, up from $14.14 billion in 2014. Alphabet’s Class A shares have gained 40% in the past year and it’s hard to believe that they will stop advancing in the years ahead, especially considering the potential of the company’s Other Bets segment. Alphabet’s Class A shares are currently trading at around 19.0-times expected earnings, versus the forward P/E multiple of 16.0 for the Information Technology sector. Andreas Halvorsen’s Viking Global owns 1.85 million Class A shares of Alphabet Inc. (NASDAQ:GOOG), as well as 1.15 million Class C shares of the company, as of the end of December.

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Disclosure: None