Headlines have been full of large tech behemoths cutting their workforces significantly, raising questions among investors as to whether these once larger-than-life companies’ best days are behind them. However, this may just be the next step in an evolving sector which is important for the trajectory of our economy.
The recent fall in tech valuations
The NASDAQ Composite, an index which holds primarily information technology stocks, has seen its Next Twelve Months Enterprise-Value-to-Sales (NTM EV/Sales) ratio compress from 4.4x to 3.1x YTD, marking over an over 30% decline in the widely used valuation metric for tech stocks. While this fall in valuations may seem extreme, it is important to note that NTM EV/Sales for the NASDAQ Composite over the past 10 years had rarely breached above 3.0x until after the Covid-19 pandemic.
The pandemic brought about a high level of exuberance in relation to tech stocks given the ongoing uncertainty as to whether society would normalize and the implications of even greater reliance on technology. Fortunately, the pandemic and its associated restrictions are rolling off across the world, but a period of very loose monetary policy still pushed up tech valuations.
Is there an opportunity in tech?
At the current juncture, tech valuations are likely to be considered “fair” as opposed to grossly undervalued. However, there still may be a potential opportunity to add exposure to tech stocks.
Firstly, tech sentiment has never been worse, and many investors have positioned into other sectors where the pain this year has been less acute. However, with valuations coming down, prospective returns are increasing within the sector.
Next, while some may view headlines of mass-layoffs as a large negative for tech companies - given that they have suggest the party of abundant growth is over - the layoffs can be viewed as a rationalization and maturing of these companies as they move from growth enterprises, focusing on the top-line, to maturity with a focus on the bottom-line. This change in focus may actually create shareholder value if operating and capital costs moderate in conjunction with sustainable (not growing) revenues.
Lastly, while social media giants attract the most attention from generalist investors, there are many tech companies which operate outside of the social media realm. These companies are very important in continuing to drive innovation across all sectors and for supporting economic development. For example, the technology surrounding energy transition is very topical and extremely important for net zero ambitions and retaining energy security and affordability.
Examples of Tech ETFs
For investors looking to gain exposure to the tech space NEO’s screener is a great way to find and compare funds. Alternatively, here are some ETFs that Canadians may wish to consider:
TEC – TD (TSX:TD) Global Technology Leaders Index ETF
Offers broad diversification with approximately 270 holdings from global mid- and large-capitalization issuers related to technology.
- AUM: $1.2B
- Expense ratio: 0.39%
- 1-month return: +2.1%
TXF – CI Tech Giants Covered Call ETF
Actively managed fund providing primarily US equity exposure, investing on an equal weight basis in at least 25 of the largest technology companies by market cap.
- AUM: $530M
- Expense ratio: 0.71%
- 1-month return: +4.0%
HTA – Harvest Tech Achievers Growth & Income ETF
An equally weighted portfolio of 20 large-cap Technology companies that is diversified across the global technology sectors.
- AUM: $305MM
- Expense ratio: 0.99%
- 1-month return: +4.7%
Data for this article is as of November 29, 2022.
The following article was originally published by our partners at the Canadian ETF Market.