Where are tech stocks headed, up or down? That’s the question on investors’ minds as we round out a week in which the sector got slammed once again. Certainly, the run-up on stocks like Microsoft (Microsoft Stock Quote, Chart, News, Analysts, Financials NASDAQ:MSFT), Facebook (Facebook Stock Quote, Chart, News, Analysts, Financials NASDAQ:FB) and Google (Google Stock Quote, Chart, News, Analysts, Financials NASDAQ:GOOGL) has been steep over the last couple of years as investors have put more and more faith in tech to drive the market forward. So, are we looking at a tech collapse like in the early 2000s?
In reality, the scene today is much different from 20 years ago, says Paul Harris of Harris Douglas Asset Management, who argues there’s no comparison between the fly-by-night operations of the dot-com era and today’s tech companies which are already well-integrated into the economic and social fabric.
“I think that a lot of these stocks have pulled back because of interest rates going up,” Harris said, speaking on BNN Bloomberg on Thursday. “People see these [tech] companies as sort of a long bond in a funny kind of way, the very high growth businesses, [but] I really feel that a lot of the companies in the NASDAQ will continue to do well.”
“I think people are comparing it to 2000, but the multiples are very, very different,” Harris said. “A lot of the companies in the NASDAQ 100 generate a tremendous amount of free cash flow, they have incredible balance sheets, most of them have no debt and they have very strong growth profiles going forward.”
Tech stocks are taking it on the chin again this week, a continuing trend where one would have to go back to early February for the last time the tech-heavy NASDAQ ended the week in the black.
Signs of a post-pandemic return to consumer spending, economic recovery and, importantly, rising bond yields are said to be provoking the pullback in tech, where names like Apple (Stock Quote, Chart, News, Analysts, Financials NASDAQ:AAPL), PayPal (PayPal Stock Quote, Chart, News, Analysts, Financials NASDAQ:PYPL) and Advanced Micro Devices (Advanced Micro Devices Stock Quote, Chart, News, Analysts, Financials NASDAQ:AMD) are all hovering around 20 per cent off their 52-week highs. Canadian tech juggernaut Shopify (Shopify Stock Quote, Chart, News, Analysts, Financials TSX:SHOP) is now 25 per cent off its 52-week high.
Just on Thursday, the NASDAQ Composite moved to negative territory for the 2021 year, which compares to the Dow Jones Industrial Average at almost two per cent in the black and the S&P 500 which is now flat for the year.
The ten-year US bond yields have a role to play in the market jitters not just around tech but on stocks across the board, as yields have now risen to 1.5 per cent. And even as the US Federal Reserve has once again promised there’ll be no key interest rate hikes over the near term, investors seem wary that an opening-up economy and signs of rising inflation will trigger a rate hike.
Fed Chairman Jerome Powell spoke on Thursday and said there likely won’t be any interest rate increases until inflation and a return to full employment in the US.
“We expect that as the economy reopens and hopefully picks up, we will see inflation move up through base effects,” said Powell. “That could create some upward pressure on prices.”
Harris said while there’s no telling how far the current pullback in tech goes, investors have little to fear with today’s tech giants.
“Yes, interest rates are going to have an impact on these stocks and I think they will pull back and I think there’ll be a buying opportunity for a lot of these companies,” Harris said. “I don’t think that these companies are going to disappear as some of them did in 2000 because they really are real businesses that are really growing and will have a strong part to play in how the world is going to look over the next several years. I don’t see that as being a problem.”
“I guess the issue is how far do interest rates go up from here, which would add to a pullback [in tech stocks] and maybe you want to buy some more at that point in time,” Harris said. “But I don’t think that I would shy away from owning some of these growth names.”
Analyst Daniel Ives of Wedbush says technology stocks still have a long runway ahead, simply because the digital transformation across all sectors of the economy is only partially complete and new evolutions such as burgeoning e-commerce and 5G networking will continue to drive growth in the sector, despite the current market wariness.
“The risk-off trade for tech has been a painful one for tech investors this week as worries around high valuations, bubble fears, rotation trade, rising yields and a focus on reopening plays take centre stage,” Ives said on Thursday.
Ives said tech stocks should run at least 25 per cent higher over the coming year, led by the FAANG group of companies.