Why Tech Stocks Are Oversold

It’s no secret that tech stocks have gotten kicked in the face in the last 6 months. The NASDAQ index of tech stocks is down 26% since November:

I’m convinced that public tech stocks are oversold right now. That’s been my gut feeling for at least a month, but today I came across some fascinating statistics.

Sequoia Capital, the best venture capital firm in history, released some stunning figures in a recent presentation to its founders:

– “61% of all software, internet and fintech companies are trading below pre-pandemic 2020 prices”

– “That’s despite many of these companies more than doubling both revenue and profitability”

– “⅓ are trading below COVID lows, when uncertainty and fear was peaking”

“- Growth-adjusted multiples [valuation divided by revenue] have fallen even further and are well below the 10-year average and pushing the 10-year lows”

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If a company doubles its revenue and profits but actually trades for less money than before, that is a bargain! If you liked it at $100 a share and $10 a share in earnings, for example, you have to love it at $75 a share and $20 in earnings!

But what about interest rates?

The NASDAQ is actually cheaper now than it was when the federal funds rate hit its recent peak in July 2019. At that time, the NASDAQ had a PE ratio of around 30 with the federal funds rate at 2.4%.

The current federal funds rate is a paltry 0.33%. Even if you look at rate expectations, they’re only around 2.8%.

Meanwhile, today’s NASDAQ PE is just 22.

And don’t forget, the Fed may not raise rates as much as expected.

Companies are laying off workers, the economy is on the edge of recession, a war is raging in Europe and COVID may return in the fall. There are many potential reasons why the Fed could back off.

Could tech stocks fall further? Absolutely.

But with every company and household pulling back at once, I think inflation will begin to moderate soon. And if it does, the Fed has a lot less reason to raise rates further, putting more pressure on tech stocks.

Fundamentally, here’s the question you have to ask yourself:

“Do I think the value of technology companies will be greater in 20 years or less in 20 years? Will they have more innovative products and paying customers, or fewer?”

The answer is obvious. Technology has transformed every industry and will continue to do so, resulting in massive profits.

And I want to be there when it happens.

What do you think is ahead for tech stocks? Leave a comment at the bottom and let me know!

More on markets:

Hedge Fund Giant Tiger Global Losing $28 Million an Hour

$6B Hedge Fund Cut Off from Trading As Investigation Looms

Credit Suisse May Need Up to $1 Billion After Huge Losses

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Photo: “Nasdaq Take 4” by bfishadow is licensed under CC BY 2.0.


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