METV - Mega-Cap Tech Earnings Hit: METV A Buy As Investors Hunt For Growth

2023-04-25 17:10:55 ET

Summary

• The focus is on mega-cap tech this earnings season to see if the major EPS growth driver can keep powering the SPX higher.
• The Metaverse ETF offers a concentrated allocation to companies that are poised to benefit from innovations related to the metaverse.
• While the metaverse concept is on shaky footing, I see the holdings of METV as quality names with reasonable valuations considering long-term growth prospects.

It's the make-or-break moment for big tech (and tech-related) stocks. This week, we hear Q1 results from the likes of Microsoft (MSFT), Alphabet (GOOG), Amazon (AMZN), and Meta (META). With mega-caps dominating the return attribution of the S&P 500 in the last few months, there are growing risks that this market is on edge given the very soft breadth measures.

Per BofA and via Carl Quintanilla , the S&P 500 has gained 297.5 pts this year, with a non-tech name not showing up until #10 Visa. The top 5 names make up 62.75% of the index points gained this year.

A Concentrated YTD SPX Gain

But if many of the largest firms can indeed post profit numbers above analysts' expectations and issue decent outlooks, it might be hard for the sellers to regain the upper hand. I reiterate my buy rating on Roundhill Ball Metaverse ETF (METV).

Big Tech Earnings Crossing The Wires: Key Dates To Watch

One ETF flies under the radar but maybe the market tell as to how the tech trade performs in the months ahead. The Metaverse ETF tracks many of the leading companies with investments in the metaverse. Its expense ratio (0.59%) is on the high side considering the liquid and concentrated portfolio and total AUM is now down to $484 million (down from $580 million last August ).

According to Roundhill , the Metaverse will be comprised of countless persistent virtual worlds that interoperate with one another, as well as the physical world, and generate a robust economy that spans labor and leisure, while transforming long-standing industries and markets such as finance and banking, retail and education, health and fitness, sex work, and more. According to Citigroup (per the issuer), the total addressable market for the Metaverse is estimated to be between $8 trillion and $13 trillion by 2030. Meanwhile, Goldman Sachs maintains a long-term estimate of $8 trillion.

Major Metaverse Growth In the Years, Decades Ahead

The high-growth, low-yield portfolio with a focus on liquidity and big size is concentrated. The top 10 holdings account for 51% of the fund, but Morningstar notes that 7 of the largest 10 positions boast wide economic moats and all but NVIDIA (NVDA) are rated 3 stars or higher.

Big-Cap Tech Stalwarts Dominate the Top 10 Holdings

56% of METV is allocated to tech while 35% is in Communication Services, per Morningstar. At the country level, it is primarily a domestic ETF with 76% of exposure to the U.S.

METV: A US Mega-Cap Fund

Digging further into the portfolio, data from Morningstar show that the price-to-earnings ratio on METV is north of 24, but long-term earnings growth is seen at 11%. So, the expected PEG ratio is just above 2, which is not an extreme valuation by any means.

Its price-to-sales ratio is higher than the market average, but not extremely so at 3.2. Income investors will likely shy away from METV considering its low 1.0% dividend yield. Rather, METV is geared toward those seeking large-cap growth exposure - just 9% of the fund is considered value and only 5% is in the small market cap space.

METV: Portfolio & Factor Profiles

The Technical Take

METV appears to be putting in a bearish to bullish reversal pattern, but there's work for the bulls to do still. Notice in the chart below that METV notched a low just below $7 on a trio of occasions in Q4 last year. The ETF then surged above $9 by February and even registered a new 2023 high earlier this month. There's support in the low $8s - that's where METV pulled back to during its February-March retreat and where the flattening 200-day moving average came into play.

With that long-term moving average potentially inflecting positive, a price breakout above $9.50 would portend another upward thrust. Overall, I like the look of the chart despite some bearish RSI momentum divergence. Long here with a stop under the $8 level appears like a solid risk/reward.

METV: Bearish to Bullish Rounded Bottom Forming, Eyeing $9.50 Resistance

The Bottom Line

I am a buyer of METV. The valuation is not extreme considering the growth prospects while the technicals appear bullish in the intermediate term.

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