Shares of technology companies have been extremely popular with investors over the past decade. Their valuations seemed to be constantly rising, benefiting from a strong economy, low interest rates and a shift to the digital economy boosting their business.
The COVID-19 pandemic has only fueled their growth, with companies like Amazon (AMZN), Meta Platforms (META), and Netflix (NFLX) seeing huge demand thanks to people spending more time at home. But as the economy appears to be finding its new normal and the Federal Reserve is aggressively raising rates to curb high inflation, many of these tech darlings have come back down to earth.
The tech-heavy Nasdaq Composite is down more than 30 percent so far in 2023 as of Nov. 1, the biggest drop among the three major stock indexes. Longtime market leaders like Meta, Amazon, Alphabet (GOOG) and Netflix have fallen even further. So should investors view the recent stock market declines as an opportunity to find value in tech stocks or as a warning of things to come?
The best time to invest is often when prices have fallen and people are pessimistic about the short-term prospects. As legendary investor Warren Buffett said, “The future is never clear; you pay a very high price in the stock market for a cheerful consensus. Uncertainty is actually the buyer’s friend of long-term values.”
Here’s what you need to know if you’re considering investing in technology stocks.
Should long-term investors buy technology stocks?
With tech stocks under pressure so far this year, some investors may be hunting for bargains, but it’s hard to predict whether things will get worse before they get better.
With technology stock valuations more attractive than a year ago, long-term investors may start pouring money into the sector, said Liz Young, head of investment strategy at SoFi. But given the volatile environment, she advises investors to “average” over time to take advantage of more attractive prices she expects to see in the coming weeks and months.
Technology companies are currently facing a number of challenges, including rising labor costs due to inflation, declining advertising revenues as the economy weakens and increased scrutiny of their valuations due to rising interest rates. “There are headwinds coming from all directions right now,” Young said.
Still, Young says investors with a time horizon of at least two years, and preferably longer, can start buying tech stocks in a diversified way. She recommends using an ETF, such as the Invesco QQQ Trust (QQQ), which tracks the performance of the Nasdaq-100 index.
(Here are some other popular technology ETFs to consider.)
Other investors have also found what they see as attractive investment opportunities in beaten-down technology stocks. The Dodge and Cox Stock Fund (DODGX), an actively managed mutual fund, initiated a new position in Amazon in the third quarter after researching companies with attractive fundamentals where investor expectations and valuations had fallen. Amazon’s stock price has fallen more than 40 percent this year since November 1. The fund also has interests in Alphabet, Meta and Microsoft (MSFT).
How rising interest rates have hurt tech stocks
Stocks of technology companies have suffered in part due to the rise in interest rates. Many technology companies have low or even negative profits because their operations are in their early stages and they are investing heavily in hopes of future growth. As interest rates rise, investors prefer companies that generate real profits and cash flow today and are less willing to pay for companies that may or may not generate profits far into the future.
For example, online retailer Carvana (CVNA) benefited from the pandemic as used car sales boomed and many brick-and-mortar dealerships closed. In 2019, Carvana generated $3.9 billion in revenue, while in 2023 the company saw revenues increase to $12.8 billion. But despite the enormous growth, the company failed to make a profit in both 2020 and 2023.
Shares of Carvana rose from a low of about $22 in March 2020 to more than $375 in August 2023 as strong sales growth boosted investors’ expectations and record low interest rates left them with few alternatives. Since Carvana’s all-time high in August 2023, the yield on a two-year U.S. Treasury bond has risen from about 0.20 percent to 4.5 percent. Over that same period, Carvana shares have fallen about 95 percent to about $15 as of November 1, 2023.
Sure, there are tech companies generating huge profits in the here and now, and some investors believe the market has overly punished these cash cows alongside stocks of more speculative issues.
Wally Weitz and Brad Hinton, co-chief investment managers of Weitz Funds, recently wrote in a note to clients that while higher interest rates are especially tough on high-growth companies that currently have little profit, several stocks have been punished because they do generate revenue and cash flow.
“Many investors seem to have made the wrong generalization about rapid growth yourself is negative in the new environment,” Weitz and Hinton said, adding that companies like Alphabet “are making a lot of profits Today and will have more tomorrow.”
The Weitz Value Fund owned shares of Alphabet, Meta and Amazon as of September 30, 2023.
A closer look at FAANG stocks
In recent years, investors have started calling the largest tech companies “FAANG,” with each letter representing each of the tech giants Facebook (now Meta), Amazon, Apple, Netflix and Google (now Alphabet). Many of these stocks have been hit hard in 2023, despite being profitable and having fairly strong long-term prospects.
Here are some key recent developments at each company, including how each stock has performed so far in 2023.
(*Note: Stock price data as of November 1, 2023. EPS estimates from Yahoo! Finance.)
Metaplatforms
The parent company of Facebook, Instagram and WhatsApp has had a tough year, with advertising revenues falling as it ramps up spending to shape its vision for the Metaverse. CEO Mark Zuckerberg has said the company will focus on its highest priority investments and return to strong revenue growth going forward.
Achievements to date: -71.7 percent
EPS estimate 2023: $8.18
Amazon
The e-commerce giant reported disappointing third-quarter results and gave weak guidance for the fourth quarter. Growth at Amazon Web Services, the company’s cloud business, has slowed and its retail business is facing challenges due to the difficult macroeconomic environment, such as high inflation and a strong dollar. The company says it is focusing on initiatives that will build a stronger cost structure going forward.
Achievements to date: -41.9 percent
EPS estimate 2023: $1.80
Apple
The iPhone maker has been a relative standout among big tech companies in 2023, with its stock outperforming the broader Nasdaq Composite so far this year. In its most recent quarter, Apple posted record revenue and earnings per share and believes it is well positioned for a strong holiday quarter, although some analysts think the company could be affected by broader macro uncertainties and currency headwinds.
Achievements to date: -14.8 percent
EPS estimate 2023: $6.30
Netflix
The streaming giant benefited from people staying home during the pandemic, but saw subscriber losses in the first half of 2023. In response, the company announced a new ad-supported option, after long saying it would never have ads. In its most recent quarter, Netflix added a net 2.4 million new subscribers and expects to add more than 4 million in the fourth quarter of 2023.
Achievements to date: -52.4 percent
EPS estimate 2023: $10.51
Alphabet
Ad revenue at Google parent Alphabet has also slowed in 2023 as its YouTube unit faces competition from TikTok and advertisers generally scale back spending due to economic uncertainty. The company says it has sharpened its focus on key priorities, including new ways to monetize its YouTube Shorts product. Alphabet’s profits have fallen as cost growth has outpaced revenue.
Achievements to date: -37.5 percent
EPS estimate 2023: $5.30
In short
While tech stocks have been under intense pressure in 2023, some investors may be willing to take another look at the beaten-down sector. If you buy individual stocks, make sure you research each company thoroughly before investing. Less experienced investors may want to consider a diversified approach by using an ETF that limits their exposure to a single company.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
