Source: Wall Street News

In this round of the bull market led by US technology stocks, the debate on Wall Street about the “bubble theory” is unstoppable. Are tech stocks dangerous now?

UBS pointed out in Thursday's report that it is currently entering the second half of the excellent performance of technology stocks. Profit growth in the US technology industry may peak in the second quarter of 2024, and may slow down thereafter.

This does not mean that UBS believes that the outlook for technology stocks is bleak. UBS continues to be optimistic about software stocks, believing that software is not only a defensive investment, but also a cyclical investment during economic growth.

The semiconductor industry, on the other hand, has more “alarm signals”. UBS points out some risks of profit and overvaluation, but overall, the semiconductor industry still excels in terms of profit growth and fundamentals, and there is no sign of excessive investment overall.

Technology stocks “four major warning signs”

UBS pointed out that technology accounts for a higher share of the US stock market value than any other industry in the past. Currently, it seems more like 1997:

In anticipation that AI may bring productivity growth, the market already has 5 or even 7 conditions (8 conditions in total) for bubble formation, which means that the market is on the verge of excessive speculation.

If the market is entering a bubble phase, now it's more like 1997 than 1999. 1999 was the peak of the tech bubble. The bubble burst in early 2000, causing the TMT industry to plummet 83% from its highest point.

UBS identified “four major warning signs”:

1. Judging from price momentum, the market is in an extreme overbought range (mainly in the semiconductor industry rather than the software industry), and in 60% of cases, there will be some form of correction.

2. The earnings gap between technology+ and non-tech per share peaked. The earnings per share of the technology+ sector is expected to increase by 42.5% year-on-year and slow to 12.2% by the third quarter of '24, while earnings per share in other sectors of the market are expected to increase by -0.2% and rise to +13.1% by the fourth quarter of '24.

3. Decoupling from long-term bond yield trends. Although rising long-term bond yields are generally viewed as a negative sign for the stock market, the overall performance of technology stocks is superior to the market. This differentiation has existed over the past year, which means more attention should be paid to the profit growth trend of technology stocks and related risks.

4. The economy may slow down, and the technology industry may benefit when the ISM New Orders Index rises. However, as economic growth expectations slow, the ISM New Orders Index may also decline, which may challenge the tech industry.

Software: there are few “bubbles” and it is expected to continue to grow rapidly

Whether as a defensive asset or as a cyclical investment during economic growth, the software industry has always been UBS's favorite. Furthermore, steady growth and a key role in the AI field have also made software stocks profitable.

For the software industry, UBS saw only two slight warning signs:

1. Positions are crowded. According to QuantAnswers data, positions in the software industry are very crowded, but this is not much different from the average of the past 8 months;

2. The rate of profit expansion seems to have peaked, but profit continues to increase.

UBS sees more favorable factors:

1. Profit risk is limited. Although profit growth is slowing down, we are still receiving profit increases. Earnings per share are slightly below the trend level. Software has always been the fastest growing industry in the market (CAGR of 10%).

2. Software stocks are clearly not overbought.

3. The valuation of the software industry is still reasonable. According to the price-earnings ratio relative to the market level, there is an 83% chance that the software industry will outperform the market in the next 3 months.

4. Stable balance sheet;

5. Software is slightly underestimated on the market narrative radar. We used Sean Simonds' market narrative radar and found that the software was slightly underrated;

6. It rose 8 places to 7th place on our global scorecard;

Semiconductors: Risks are greater, but there are also positives

UBS has pointed out more risks in the semiconductor industry:

1. Profit risk. Profit is 15% higher than the trend level, indicating that the industry is at risk of overheating;

2. The valuation is too high. Compared with the price-earnings ratio, it is close to the high point before the recession. According to the 2030 forecast, the ratio of market value to TAM is about 6 times, and the price-earnings ratio and price-sales ratio are at a relatively extreme level;

3. The product name on our global scorecard dropped 6 places, ranking 15th out of 24 industries;

4. Profit growth is slowing down. Profit growth is still the strongest in all industries, but expectations for future profit growth are stabilizing or weakening, and at the same time, there is a big difference with performance;

5. Compared with the software industry, the semiconductor industry has relatively high purchase recommendations;

Despite these risks in the semiconductor industry, the UBS report also mentioned some positive aspects, such as strong profit growth for some companies in the industry, high quality scorecard fundamentals, and no evidence of excessive investment in the industry as a whole. Furthermore, the semiconductor industry's revenue accounts for only 0.6% of global GDP, which is slightly above the trend level.

UBS is optimistic about the growth prospects of Nvidia, the “king of chips,” giving it a “buy” rating. The target share price is $1,100:

Nvidia is the only chip company that can create its own market. If we look at the price-earnings ratio relative value, the stock is clearly not expensive (the price-earnings ratio is in the middle of its historical range), but the problem is that even a multiple of sales after four years appears to be very high, reaching 15.5 times the forecast for January 2028.

UBS suggests investors should be more careful when choosing semiconductor stocks, favoring companies with lower valuations. UBS also expressed its preference for TSMC, believing that TSMC has a clear advantage in terms of technology and market share.

editor/tolk