Technology stocks under the microscope

High, but fundamentally justified

The technology sector is trading at a valuation premium to the overall market. For example, the price/earnings ratio based on the next 12 months is 30 compared to 20 for the global stock index. The valuations are therefore above the historical average, but appear justified in view of the growth potential. The tech sector has accounted for 43% of earnings growth over the last three years, and earnings growth is also expected to be significantly higher in the coming years (19% versus 6%).

Demand exceeds capacity

In addition to the valuations, the high and increasing investments of the big tech companies are being criticized. At first glance, this may seem like an arms race. In fact, however, investment plans have had to be raised repeatedly because the demand for large voice models such as ChatGPT is increasing sharply and exceeding existing capacities.

The comparison lags

In our view, the discussion about a possible tech bubble falls short of the mark. In contrast to the dotcom era, today’s valuations are based on real profits and investments in promising infrastructure. We are only at the beginning of the adoption of artificial intelligence and are already seeing fundamental changes in business processes that will bring significant efficiency gains and are likely to lead to further profit increases for large tech companies.

We derive three specific recommendations for action from this assessment:

1. Ensure strategic technology positioning
   

In an environment of structural transformation, an overly defensive positioning harbors its own risks. In our Classic mandates, we hold 25-30% tech exposure (IT and communication services). Compared with the global world index, where the technology component accounts for over 37%, we are nevertheless deliberately underweight. This allocation takes account of the structural growth and quality of the sector without exposing the portfolios to excessive concentration risks.

2. Invest selectively

The tech sector in particular separates the wheat from the chaff in the long term. Markets react particularly emotionally here, which regularly leads to exaggerations. This makes careful stock selection with a focus on sustainable business models and reasonable valuations all the more important.

Our favorite stocks from the large-cap segment are Microsoft, Amazon and Alphabet. All three combine double-digit earnings growth with moderate valuations: The EV/EBITDA multiples are below 20, the price/earnings ratios around 30. For companies of this quality and growth momentum, these ratios seem appropriate to us. We supplement the large tech stocks with ETFs in the AI ecosystem and cybersecurity sectors in order to participate in the high structural growth potential of these themes.

3. Realize profits

Successful portfolio management also means taking profits after strong price rises. We have therefore recently reduced large tech positions and reallocated the proceeds to healthcare, which is currently attractively valued. This discipline protects against cluster risks and makes it possible to systematically exploit valuation differences between sectors.

Conclusion

In our view, the technology sector is not going through a speculative bubble, but a phase of fundamental innovation with real profit prospects. In the face of accelerating change, technology remains one of the strongest drivers of long-term value creation. The combination of structural AI growth, solid corporate earnings and moderate valuations for selected quality stocks justifies a substantial allocation. At the same time, the market dynamics and valuation levels in the sector require selective stock picking and consistent risk management. With our balanced positioning, we are taking advantage of the opportunities offered by the tech sector without exposing ourselves to excessive risks.

Publisher: Tareno AG, Gartenstrasse 56, 4052 Basel, Tel. +41 61 282 28 00, info@tareno.ch, www.tareno.ch. We welcome feedback on our publication. This content is for information purposes only. The publication contains neither legal nor investment advice or investment recommendations and does not constitute an offer or solicitation to make an investment.

Images / graphics: The graphics were produced by Tareno AG from public market data.