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Top technology firms such as Microsoft Corp (NASDAQ:MSFT) and NVIDIA Corp (NASDAQ:NVDA) have recently generated business headlines for the possibility of a sector turnaround. Since July, several innovation specialists that previously benefited from the rise of artificial intelligence began showing weakness. However, the blistering surge in the Cboe Volatility Index or VIX contributed to a dramatic selloff earlier this month.
At the time, concerns accelerated that the narrative of generative AI had overshot itself. Still, with the market digesting the red ink, the bulls are starting to bid up the underlying discount. What's more, Crossbridge Capital Chief Investment Officer Manish Singh waved off fears tied to a looming tech bubble burst. Instead, he sees no evidence of a bubble, noting that the Nasdaq index has generally represented a steady hand.
Rather than panic, Singh encouraged investors to "embrace volatility." That might not be bad advice. For example, while MSFT stock appears hotly valued with a price-to-sales ratio of 12.4, this premium to sales averaged 14.11X throughout the second quarter this year.
A similar argument can be made for NVDA stock, which currently features a price-to-sales ratio of over 34. While extremely elevated compared to the semiconductor industry, the premium stood at over 45X in Q2 of last year.
Nevertheless, investors may also consider the other side of the coin. Recently, Barclays analysts warned that enterprises face a significant risk justifying their expenditures in graphics processors — the kind that powers the most advanced AI protocols. The hidden danger is depreciation. Essentially, the combination of aggressive design cycles combined with entities underestimating their depreciation costs, could form an unexpected headwind.
The result? Generative AI stocks and related investments may incur a down cycle over the next year.
The ETFs: For investors interested in extracting short-term profits off the dynamism of the tech ecosystem, Direxion offers two compelling leveraged exchange-traded funds: Direxion Daily Technology Bull 3X Shares ETF (NYSE:TECL) and Direxion Daily Technology Bear 3x Shares (NYSE:TECS).
TECL is appropriate for aggressively optimistic traders who anticipate a near-term rise in the underlying Technology Select Sector Index. Aside from its top two holdings in Microsoft and Nvidia, the index also features consumer electronics giant Apple Inc (NASDAQ:AAPL) and semiconductor and software specialist Broadcom Inc. (NASDAQ:AVGO).
On the flipside, TECS is geared for the aggressive pessimist. It aims to provide 300% of the inverse performance of the Technology Select Sector Index. Either way, both ETFs carry the same warning: the exposure is only designed for periods no greater than a day. Beyond that, the inherent volatility of 3X funds and the daily compounding effect can easily lead to value decay.
The TECL ETF: Thanks to the positive implications of the Producer Price Index released earlier Tuesday, the lower-than-anticipated rise in prices may give the Federal Reserve the green light to lower the benchmark interest rate. In turn, risk-on assets like tech stocks soared, boosting the TECL ETF.
The TECS ETF: Unlike the bull fund, the TECS ETF responded negatively to the PPI report as the flow of cheaper money generally has positive implications for tech firms. However, households with young children have been hit hard with inflation, reflecting broader pain on Main Street that could eventually impact Wall Street.
Featured image by Dmitry Steshenko from Pixabay.
