April 2024 / EQUITY
What is your view on current valuations in technology?
A look back through history and why Dom Rizzo thinks most of the technology universe still has reasonable valuations today
Video Transcript
Well, I think this is why it's so important to have an investment framework. When you're investing in global technology stocks, you need to focus on those linchpin technologies that are innovating in secular growth markets with improving fundamentals. But you also need to make sure you pay a reasonable valuation for those stocks. Many investors learned that lesson the hard way post COVID as interest rates went from 0% to 5%.
So let's take a look at the global valuations of many of the most talked about names. The Magnificent 7 are the poster child for these tech stocks that have gone up a lot and may look expensive optically, but I think we need to take a step back with those seven stocks. There've been two other periods of history in markets with somewhat similar global market concentration. One was during the Nifty 50 and one was during the Internet bubble. And if we look at those two different periods, let's go study some of those valuations. During the Nifty 50, those stocks traded at roughly 34 times earnings if you looked two years out. During the tech bubble, many of those stocks traded over 50 times earnings. Cisco, the poster child, traded at over 100 times earnings. Now let's look at those Mag 7 stocks. Broadly speaking, they trade at a mid to high 20s PE multiple if you look out two years. Not only that, they have some of the highest returns on equity in the entire market and they grow earnings faster than the rest of the market. In any given year, those Magnificent 7 stocks may grow earnings 2 to 3X faster than the rest of the 400 plus stocks in the S&P 500. And if you look at those valuations versus the rest of the market, they're actually pretty reasonable if you adjust for the growth rates. Those other stocks trade at roughly 17 times earnings today depending on the day. The Mag 7 trades at mid to high 20s, but they grow earnings over 2 times as fast. So, if you look at those PE multiples on a growth adjusted basis, I actually think most of the technology universe has still pretty reasonable valuations today.
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Dominic Rizzo is the portfolio manager of the Global Technology Equity Strategy. He is a vice president of T. Rowe Price Group, Inc., and T. Rowe Price International Ltd.