Investors should start prioritizing equity stability and valuations over crude growth in this very nervous market.
Many tech stocks outperformed the market last year, as pandemic trends and ensuing restrictions turned the shares of many cloud, e-commerce, fintech and gaming companies into defensive investments. Those companies were not severely penalized by the pandemic, and some of them even generated an acceleration of growth during the crisis.
However, many of these companies have lost their shine in the last month since investors have moved from value stocks to growth stocks. Let’s see why this ‘rotation’ has squeezed many tech stocks and whether or not investors should invest in this broken sector.
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Why are tech stocks crashing?
Investors are moving away from high-growth tech stocks for three main reasons:
In the first place, many of these stocks were trading at unsustainable valuations. It is generally risky to pay for a stock traded over 20 times the sales for a company, even if in reality those high price / sales ratios became the ‘new normal’ during the pandemic.
Secondly, the increase in vaccination rates makes stocks in other sectors in crisis, such as retail, travel and energy, more attractive to investors given the cheaper prices compared to their growth with the reopening. more activities. Meanwhile, tech stocks that rose during the pandemic will face tough comparisons with year-over-year results after the pandemic-induced crisis ended.
Third, the prospects for a post-pandemic economic recovery are driving up bond yields. In particular, the rapid increase in the yield on 10-year US Treasuries, which recently exceeded 1.7%, is pushing investors to sell more stocks and park more cash in government-guaranteed bonds.
Here’s what happened to Zoom Video Communications (NASDAQ: ZM) and Shopify (NYSE: SHOP), both of which generated robust growth during the pandemic as the yield on Treasuries rose this year.
Both companies will face difficult comparisons in a post-pandemic world. People could rely less on video conferencing tools like Zoom when they get back to work and school, and fewer businesses could open online stores with Shopify. As a result, both companies will inevitably generate slower growth this year, but their shares are still trading at high price / sell ratios.
Therefore, I would not recommend investing any of these hyper-growth stocks until their valuations have returned to more ‘real’ value.
Instead, focus on cheaper tech stocks
In this context, it makes more sense to invest two other types of technology stocks
First, the ‘mature technology’ companies like Oracle (NYSE: ORCL) e Cisco Systems (NASDAQ: CSCO), both of which are trading at 15x forward earnings, should resist the downturn. Both companies generate slow growth, but their shares are cheap, pay higher dividend yields than Treasuries and are expected to grow faster in a post-pandemic world as customers ramp up their spending again.
Second, market leaders who generate double-digit percentage sales growth are not dependent on home trends and are still worth buying at reasonable valuations. It might seem difficult to find companies that control all three of these characteristics, but Salesforce.com (NYSE: CRM) e Palo Alto Networks (NYSE: PANW) are up to par.
Salesforce, a cloud services giant that plans to double its annual revenue by fiscal year 2026, is operating at just 50 times forward earnings and eight times this year’s sales. Analysts expect Palo Alto Networks, one of the world’s leading cybersecurity companies, to increase its sales by 23% this year and its shares also look relatively cheap.
For now, investors should still seek out both value and growth stocks in the tech sector, but avoid hyper-growth stocks that generated outsized returns last year.
However, to be avoided altogether right now is Chinese technology. Many of these companies, including Alibaba, may seem cheap compared to their growth. However, China’s antitrust regulators are squeezing many of those top companies back home as they also face deletion threats in the United States.
How to choose the shares to invest in
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