Despite the overall high valuations of technology stocks and the pressure from rising bond market yields, there are still opportunities to be found.
Technology stocks are overvalued, but there are still potential investment opportunities across the sector.
As earnings season approaches, Wall Street is focusing on the high valuations of technology stocks while also paying attention to the surge in bond yields. Rising yields are typically detrimental to technology stocks because the valuations of growth companies are based on future profits, and the value of those profits diminishes when long-term bond yields rise. The market also anticipates that inflation will remain stubborn, and the Federal Reserve may maintain high interest rates for an extended period, putting more pressure on large technology stocks.
$Nasdaq Composite Index (.IXIC.US)$Since the historical high on December 16, it has fallen by 5.4%, and investors have become aware of this risk. The Earnings Reports season will once again focus on the valuations of these companies, and performance that is just slightly above expectations may not be sufficient to sustain the market's Call sentiment towards Technology Stocks.
Nevertheless, most of the gains over the past year have come from the technology sector, particularly driven by the AI fever among the 'Big Seven' tech stocks.
On the eve of earnings season, finding growth stocks with low valuations and upward momentum may be a successful strategy. Barron's analyzed the Nasdaq Index, screening for technology companies that meet this criterion and focusing on projects that Wall Street is closely tracking.
Currently,$NASDAQ 100 Index (.NDX.US)$The expected PE ratio is 27.6 times, higher than its average of 26.9 times over the past five years. AI concept stocks$Palantir (PLTR.US)$have an expected PE ratio as high as 136.3 times, one of the "seven giants"$Tesla (TSLA.US)$is 117.6 times. These are $NASDAQ 100 Index (.NDX.US)$ the stocks with the highest valuations in the sector.$Amazon (AMZN.US)$and $Apple (AAPL.US)$ The valuations are also not cheap, at 34.5 times and 30.4 times.
In contrast, $Alphabet-C (GOOG.US)$ is the company with the lowest valuation among the 'seven giants,' with an expected PE of only 21 times, which is not only lower than the NASDAQ 100 Index and its 'seven giants' peers, but also lower than $Alphabet-C (GOOG.US)$ The average value over the past five years is 22.9 times. Its stock price has increased by 34% over the past 12 months.
$Alphabet-C (GOOG.US)$ Recently recommended as one of the stock picks by Barron's, it still faces regulatory challenges. Furthermore, investors are concerned about the uncertain high returns on the company's investment in AI and the worry that competitors' AI Search Engines may eat into Google's market share. However, some Analysts believe that under the new government (presidential candidate Donald Trump), the regulatory environment may ease, and Google's AI investment is expected to yield returns. The quantum computing chip announced by Google last December$WILLOW (0008.MY)$has also sparked market expectations.
$Qualcomm (QCOM.US)$Its stock price has risen by 11% over the past 12 months, making it another relatively cheap technology stock with an expected PE of 13.6 times. This chip manufacturer supplies chips for Apple's iPhone and had previously signed agreements to provide 5G chips to Apple until 2026. However, Qualcomm is expected to gradually lose Apple's Orders in the future as Apple plans to use self-developed chips. Nevertheless, Qualcomm plans to expand into the PC market and unveiled the all-new Snapdragon X processor at the CES Consumer Electronics Show.
Memory chip manufacturers.$Micron Technology (MU.US)$This year has shown strong performance, with the stock price rising 12.95% since January 1, and 15% in the past 12 months, with an expected PE of only 10.8 times. Though weak demand in the PC market remains a significant risk, some Analysts recommend buying Micron, believing that its High Bandwidth Memory (HBM) and Dynamic Random Access Memory (DRAM) products are essential components for AI systems.$NVIDIA (NVDA.US)$CEO Jensen Huang also mentioned at the CES conference that Micron provides storage support for the company's new gaming chip.
In conclusion, despite the high overall valuations of Technology stocks, digging deeper can reveal high-quality symbols that break the trend.
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