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Stock Strategist Industry Reports

Are There Any Values Left in Tech?

The sector's expensive overall, and some valuations are downright alarming.

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Much went right for the U.S. technology sector in 2020. It significantly outperformed the broader U.S. market for the year, and more than a handful of stocks saw significant price appreciation. In some cases, tech stocks were a safe haven because enterprises did not slash their software budgets during the COVID-19 pandemic. In other cases, enterprises and consumers turned to a wave of cloud, remote working, and e-commerce technologies such as Zoom (ZM), DocuSign (DOCU), Shopify (SHOP), Zscaler (ZS), and others. Software companies like Coupa (COUP) and Twilio (TWLO) prospered from strong secular growth trends despite the pandemic. Zoom was a prime example of a countercyclical name, rising over 390% in 2020. Many other stocks doubled in the year, and prices exceeded our fair value estimates.

Looking at U.S. tech today, we would need a pullback in stock prices before we could recommend many names to investors with an adequate margin of safety. The median price/fair value estimate ratio across our coverage was 1.22 as of Jan. 21, one of the highest ratios we’ve seen since 2007.

Brian Colello does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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