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.