Published November 15th 2022

Daily Brief - Down 50%+, is tech now cheap?

“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down,” Warren Buffett once joked. “Black Friday”, the mammoth post-Thanksgiving sale, is fast approaching so bargains will be on the minds of many. Are tech stocks cheap enough to add to the shopping list?

It’s been a bloodbath in US equities but tech stocks in particular have plunged by eye-popping percentages. Amazon, Netflix and Meta have lost a whopping 48%, 58% and 70% of their value this year (less after a vertiginous Thursday climb). They are most certainly on sale. However, are they a good deal?

Enter the value investor. They earn this title because they seek out stocks unloved by other investors despite solid fundamentals. Tech stocks have historically been an unattractive proposition to such frugal types.

The original value investor was Benjamin Graham, and Warren Buffett is his most famous disciple. To him, tech multiples would have been positively off-putting at the start of the year: Alphabet, Amazon, Apple, Meta and Netflix were on average 38 times earnings and 12 times book value compared to the broader market at 24 times earnings, and 4 times book value.

Why do investors tolerate such multiples in the first place? Someone clearly believes they are worth paying , that is how markets work.

For starters, tech companies are difficult to evaluate in the usual value-investing framework. They have relatively few physical assets that can be conventionally captured as “book value” and many intangible ones (software, IP, human capital) that are usually excluded.

In fact, a key reason why WeWork leadership tried so hard to portray itself as a tech company - rather than, more fittingly, a real estate one - is that it opened up this gray area for valuation (and ludicrous concepts like “community-adjusted EBITDA” …)

Tech companies also tend to be fast growers, opening any PE multiples to the risk of serious understatement of future profits. This is the characteristic that most appeals to “growth” investors. Rather than looking for bargains, they look for companies with strong profit momentum.

The trade-off? Value investors missed out on years of exciting growth but also avoided the recent crash.

However, for the first time since the bust, value investors might take another look at the tech sector. Growth stocks have come crashing down albeit not yet enough, if 2000 is the right paradigm.

growth vs value stocks

Many stocks, including Amazon and Netflix, remain expensive on value measures. However, two giants, Alphabet and Meta, with a P/E of 17 and 9, appear to be a bargain even in the “value bin”.

In fact, at 2 times book value, Meta may have found its way even into Benjamin Graham’s shopping cart. It could be an exciting sale season ahead.

Idea Spotlight: Alibaba

TOGGLE analyzed 12 similar occasions in the past where analyst revision indicators for Etsy were deteriorating and historically, this led to a median increase in Alibaba price. This insight received 7 out of 8 stars in our quality assessment.

Investors are betting Alibaba Group Holding Ltd. may finally see its fortunes turn around after a rough 2022 plagued by a 40% slump in the shares. They report earnings on Thursday!

alibaba price history

Daily Brief - Down 50%+, is tech now cheap?

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