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Prices Are Steep for Tech Stocks

Wait for a pullback in the sector, which currently has one of its highest price/fair value ratios since 2007.

Prices Are Steep for Tech Stocks
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Brian Colello: As of Jan. 30, technology was about 11% overvalued, as measured by the price/fair value estimate ratio for the median tech stock. This was one of the highest ratios we've seen since 2007. Maybe we'll get a pullback due to coronavirus. Semis been an area that we thought were undervalued for almost all of 2019, due to U.S.-China trade wars, but semis have rallied, and now there are only a couple of names trading at reasonable prices, while several more are overvalued. In software, we saw a bit of a pullback in August through October 2019, particularly for names with aggressive valuations. But software's been on a tear the past couple of months as well. Looking across our coverage, Apple, which is always an important tech bellwether, is near all-time highs with strong iPhone and wearable sales. Yet, we think the stock is a little bit overvalued today.

In software, we raised our fair value estimates for Microsoft and ServiceNow after they delivered strong quarters. So, we see a modest margin of safety in those names today. Intel's another one to watch if there's a pullback. It was a best idea of ours for all of 2019, and it rallied with a good quarter in Q4. And our best ideas, which have not reported yet this quarter, are still Palo Alto Networks and VMware. Finally, looking at the key trends in technology, all of the secular shifts are still intact. Cloud computing, 5G network build-outs, artificial intelligence investments, and advancements in the car, like ADAS in electric vehicles.

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Brian Colello, CPA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.