Points of view: Technology stocks

This week Oliver Phillips of NW Brown focuses on the technology sector following an interesting article in the Telegraph.

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The article highlighted that the NASDAQ index surpassed 6,000 for the first time and drew comparisons with the dotcom bubble of the 1990’s.

The NASDAQ index has a weighting of over 50% in technology stocks and serves as an indication of the performance of the technology sector.  Since March 2009 the index has had an annualised performance of roughly 20%.

The dotcom bubble was synonymous with the overvaluation of companies and investors ability to ignore companies’ underlying profits.  Indeed, these themes can be observed in some form in the current market.  The NASDAQ performance has inflated it well above the S&P 500 – indicating investor enthusiasm for tech stocks.  There are also signs of investors ignoring profits, illustrated by Netflix recent strong performance, despite being estimated to lose $2bn this year.

Technology has, however, moved on since the turn of the century.  Most noticeable the rise of the internet, broadband and smart phones has created an environment in which disruptive technology can thrive.  In addition, the valuations of tech companies do not look as stretched as previously.  In 2000 Microsoft’s price to earnings multiple peaked at 57 times. Today it is 30 times. 

Investors can take some comfort from the more modest (but still high) valuations and the greater maturity of the sector. For these reasons we are not predicting an imminent decline in the sector. However, whilst the growth expectations are attractive the ratings leave little room for disappointment. Given our value bias we find it difficult to be optimistic about highly rated sectors.

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