Big Tech Stocks Like Microsoft and Nvidia May Fall. But Don’t Worry About It That Much.
June 1, 2023
Big tech stocks have had an incredible run, and you may be tempted to sell them in order to prevent the inevitable falls.
Hold on to them if you’re a long-term equities investor. When you consider how rapidly earnings are expanding, some of the largest firms out there, from Microsoft (MSFT) to Nvidia (NVDA), are still reasonably valued.
The Nasdaq 100 index, which includes just over 100 of the Nasdaq Composite’s top non-financial businesses, is up almost 34% from its bear market trough in late December. The S&P 500 stock index is up 9% year to date, while the Vanguard S&P 500 Value Index Fund ETF (VOOV) is up only 4%.
For example, big tech stocks such as Meta Platforms (META) have nearly doubled from its bottom in the second half of 2022, while Alphabet (GOOGL) is up roughly 50%. Nvidia and Microsoft have more than doubled and are up approximately 55%, respectively, from their lows in late 2022. These firms are incorporating artificial intelligence into their products and extending their service markets while dropping bond rates have increased their values.
In comparison to the Russell 2000, the Nasdaq 100 is now valued around eight times as much as it was a few months ago. The last time the Nasdaq 100 outperformed the Russell 2000 was in 2020, when historically low interest rates increased the value of growth stocks and Covid-related regulations kept people indoors and in front of screens, driving up revenue for streaming, social media, and work-from-home essentials like the cloud.
Technology wasn’t pleased with that. Interest rates increased due to higher inflation, and people started spending more time outside the home as the epidemic receded, which resulted in a decline in tech income. For the most of 2021 and 2022, the Russell 2000 outperformed the Nasdaq 100. But perhaps things will go differently this time. The long-term forces driving tech are still in place, even if it is anticipated that the performance of tech companies would wane and investors may find better possibilities in particular market segments.
According to FactSet, analysts at Nvidia, Microsoft, Meta Platforms, and Alphabet forecast double-digit earnings-per-share growth for several years. Meanwhile, while values are high, they are not out of control.
Alphabet and Meta are trading at little more than 20 times the projected EPS for the next year, which is less than two times their predicted annual EPS growth rates for the next several years. While Nvidia and Microsoft are trading at 48 and 30 times profits, respectively, that is still less than two times the forecast EPS growth. These aren’t outrageous pricing, given that the S&P 500 trades at 18 times earnings and expects EPS growth of only 8% over the next few years.
The road ahead for big tech stocks will not be easy — it seldom is. According to technical experts, there may be a lack of buyers because fund managers have piled up on tech companies and are unwilling to take any more risk at higher prices. Indeed, tech equities have finally bottomed out in recent trading days.
However, unless you believe that advances such as artificial intelligence aren’t here to stay, tech stocks will resume their upward trend. Maintain your current path of action.