While the tech sector has somewhat recovered this year, handily outpacing the broader S&P 500 benchmark index, the valuations are still well below their peaks.
What’s affecting the value of tech stocks?
Over the past year, the tech sector has had to contend with a perfect storm of macroeconomic events including global economic uncertainty, the war in Ukraine, red-hot inflation, rising interest rates, the ongoing supply-chain crunch, stretched valuations and subpar earnings.
Moreover, the value of many technology stocks largely depends on their future earnings, and if investors reduce their expectation for tech-stock growth or think future earnings will be lower, the value of these stocks drops more precipitously than the broader market.
For instance, Amazon, Netflix and Meta shed a whopping 48%, 58% and 70% of their value, respectively, in 2022.
It’s little surprise that leading tech firms like Google, Microsoft and Amazon have been forced to take drastic steps, including mass layoffs, to improve their bottom line.
Is now a good time to invest in tech stocks?
Such steep discounts mean tech stocks are certainly on sale. For the better part of the past decade, tech stocks have appeared mighty expensive on two key measures: share price to earnings, which is the market value of a firm relative to its profits; and price-to-book value, the price of a share relative to the value of a company’s assets.
The current reading of these measures suggests tech stocks are now far below their peaks. So, is now an opportunity to snap up some good deals?
Few would dispute that the best time to invest is when prices have fallen and quality names are trading at a meaningful discount to their fair value, also known as the intrinsic value. The recent sell-off that came after a multi-year bull market saw tech giants such as Meta, Amazon, Apple, Netflix and Google (a subsidiary of Alphabet)—together shortened to popular acronym FAANG—lose trillions of dollars in market cap. This created attractive buying opportunities for opportunistic investors.