Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn
About

News

US tech still overpriced despite risk-fuelled falls

Brian Colello  |  23 Oct 2018Text size  Decrease  Increase  |  
Email to Friend

Apple Nasdaq

Despite recent falls in tech stocks, Morningstar analysts view the overall sector as slightly overvalued, with the Nasdaq still around 15% higher than the same time last year. Last earnings season saw a shakeout in the sector, with Facebook shares slumping.

So far this tech earnings season, Netflix stock has gained sharply on record subscriber numbers. This week sees including Amazon and Google parent company Alphabet report earnings, with Facebook and Apple due the following week.

Before the sharp falls in the Nasdaq at the start of October, the tech index had been posting record highs in the third quarter, maintaining a level above 8,000 points. In the same period, Amazon and Apple became trillion dollar companies.

Away from the headline-grabbing product launches like the iPhone X, the single most important trend in technology remains the ongoing shift toward cloud computing, as enterprises move their computing workloads to pay-as-you-go business models that lead to greater flexibility, security, and cost savings. The shift has ramifications for dozens of stocks across Morningstar's global coverage.

Although the tech sector is overvalued today, we see a couple of undervalued names that are strong beneficiaries of cloud computing, such as Salesforce.com. Independent of valuation, we still see winners among infrastructure-as-a-service vendors, such as Amazon.com Web Services, Microsoft Azure, and Google.

Trade war worries

The US-China trade war continues to add risk to technology investments; although companies have not been hit hard by tariffs just yet, we see many tech leaders assessing the current political situation and hoping for a satisfactory outcome. Apple's popular gadgets, such as the iPhone and Apple Watch, are believed to be exempt from the trade war for now, which we suspect is a relief to the technology supply chain as the vast majority of Apple's devices are assembled in China.

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

Any tariffs slapped on Apple products could have negative ramifications for dozens of technology stocks under our coverage, as lower demand for iPhones could weigh on revenue from many component suppliers that count on the smartphone titan as a large customer.

We continue to see M&A as a key theme in technology. We anticipate more software deals in the years ahead, as leading vendors like Adobe, Microsoft, Salesforce, Oracle, Workday , and others branch out from their core product lines and tack on adjacent opportunities. Similarly, non-traditional software vendors like Cisco Systems and Amazon may make software-related deals as well, as software is becoming a more important portion of their enterprise offerings.

 

More from Morningstar

• Running out of money: Australians fret about retirement

• Worley $4.6bn offer for Jacobs logical, say analysts

Make better investment decisions with Morningstar Premium | Free 4-week trial

 

Brian Colello, CPA, is a senior equity analyst for Morningstar, based in the US.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is a senior equity analyst with Morningstar, based in the US.

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend