Is the valuation of technology giants too high? It's still worth betting on in the long run!
According to data from FactSet, analysts predict that Nvidia, Microsoft, Meta Platforms, and Alphabet-C will achieve double-digit earnings growth per share in the coming years.
The rise of technology stocks is amazing, but they may be difficult to avoid falling.
"I do think there is a possibility of mean reversion," said Keith Lerner, co-chief investment strategist at Truist, "but we still like large technology companies."
However, if you are a long-term stock investor, you can hold stocks.
From large companies such as Microsoft to Nvidia, if you consider their profit growth rate, their valuations are still reasonable.
Are technology stocks overvalued?
The NASDAQ-100 has risen by about 34% from its bear market low at the end of last year. In contrast, the S&P 500 has risen 9% so far this year.
Compared with the low point at the end of 2022, Nvidia and Microsoft's stock prices have risen by more than twice and about 55%, respectively.
Meta has almost doubled from its low point in the second half of 2022, while Alphabet's stock price has risen by about 50%.
These companies are applying artificial intelligence to their products and expanding their markets for their services, and the decline in US bond yields has also pushed up their valuations.
The NASDAQ-100 is currently about 8 times the Russell 2000 index, compared to less than 6 times a few months ago.
The last time the NASDAQ-100 exceeded the Russell 2000 index to a similar degree was in 2020.
This time may be different
Of course, the performance of technology stocks may be moderate, and investors may find better opportunities in certain areas of the market, but the long-term trend driving technology stocks still exists.
According to FactSet data, analysts expect Nvidia, Microsoft, Meta, and Alphabet to achieve double-digit earnings growth per share in the next few years. At the same time, although the valuation is high, it is not out of control.
Alphabet and Meta are expected to have a price-to-earnings ratio slightly higher than 20 times next year, less than twice the expected annual growth rate of earnings per share in the next few years.
Although Nvidia and Microsoft have price-to-earnings ratios of 48 times and 30 times, respectively, this is still less than twice their expected earnings per share growth.
"Considering that the price-to-earnings ratio of the S&P 500 index is 18 times, and the expected earnings per share growth rate in the next few years is only 8%, these valuations are not unreasonable."
