Technology stocks still look attractive for the long term despite rich valuations and a recent drop in their share prices,, according to Barron’s. The main reason is that the tech sector has enjoyed strong earnings growth for years, and this trend is poised to continue for the foreseeable future, “as technology burrows into nearly every aspect of the economy,” in Barron’s words. As a result, tech is an especially attractive sector in a slow-growth economy. Finally, many tech stocks actually are cheap, Barron’s argues.
Tech sector earnings are expected to rise by 12.4% this year and 11.3% in 2018, according to data from Thomson Reuters Corp. (TRI) cited by Barron’s. While many investors and analysts are concerned about a repeat of the dotcom bubble of the late 1990s that morphed a dotcom crash starting in the year 2000, today techs account for about 22.5% of the S&P 500 Index (SPX), much less than 30% back then, Barron’s indicates. Additionally, while the S&P 500 tech sector peaked in the year 2000 at a stratospheric valuation of 70.1 times trailing earnings, today it is trading at a multiple of 23.9, only slightly above the 21.6 price-earnings (P/E) ratio for the S&P 500 as a whole, Barron’s adds.
New Products, Services and Users
New products, services and growth in users are likely to be the big drivers for consumer-oriented tech companies in particular, Barron’s says. Social media leader Facebook Inc. (FB) is expected to reach two billion active monthly users in 2017. Meanwhile, Facebook’s average monthly advertising revenue of $20 per user has the potential to double, in the opinion of Daniel C. Chung, CEO and chief investment officer of investment firm Fred Alger Management Inc., per Barron’s.
Amazon.com Inc. (AMZN) is a retailing colossus, whose giant footprint now is expanding into bricks-and-mortar grocery sales with its announced intent to acquire Whole Foods Market Inc. (WFM). The market apparently registered a vote of confidence on this strategic move, as Amazon’s shares rose 2.4% on news, Barron’s reports. (For more, see also: Amazon Up, Grocers Down After Surprise Acquisition.)
Microsoft Inc. (MSFT), meanwhile, is registering strong growth in cloud computing services, and is challenging Amazon’s leadership in this field. While Microsoft remains primarily a developer and vendor of software, cloud computing is a rapidly growing and lucrative market. (For more, see also: Microsoft Could Surpass Amazon in Cloud Computing.)
Nonetheless, some analysts and strategists are concerned that the tech sector is “too crowded,” with asset managers being significantly overweight in tech stocks, especially the largest players such as the so-called FAANG stocks. Such crowding probably added to the recent selling pressure on tech stocks, Barron’s indicates. According to Bank of America Merrill Lynch, a division of Bank of America Corp. (BAC), so-called crowded stocks usually perform less well in the short term than less widely held stocks, Barron’s says. Savita Subramanian, head of U.S. equity and quantitative strategy at Merrill Lynch, warns Barron’s that weakness in tech could persist while fund managers adjust their positions, but says “It isn’t a fundamental bubble.” (For more, see also: FAANG Short Bets Top $27 Billion.)