Big Tech Stocks: A Buying Opportunity for Long-Term Investors
Big Tech stocks have declined, but long-term investors see a buying opportunity. Affordable valuations and projected earnings growth make these stocks attractive.
Big Tech stocks, including Apple (AAPL), Microsoft (MSFT), Amazon.com (AMZN), Nvidia (NVDA), and Tesla (TSLA), have recently experienced a decline ranging from 9% to 14% from their 2023 peaks. However, savvy long-term investors view this as a significant buying opportunity.
While Alphabet (GOOGL) and Meta Platforms (META) have also faced declines of 3% and 6% respectively, the overall impact on the tech sector has been less severe.
The declines can be attributed to various factors such as inflated valuations, the saturation of popularity, and the notable rise of the 10-year Treasury yield. This yield has surged to 4.8% this past week, the highest level since 2007, from a summer low of 3.7%.
Despite the recent setbacks, there is a compelling bull case for investing in Big Tech stocks.
It is highly likely that the rise in yields will begin to slow down from this point forward. This is because they have already incorporated the Federal Reserve's plan to maintain higher interest rates for an extended period. Even a slower increase in yields would be beneficial for tech stocks.
According to Goldman Sachs, if the 10-year yield remains flat or increases by half a percentage point over the next two months, the group of seven tech stocks mentioned earlier is projected to outperform the other 493 companies in the S&P 500 by two or three percentage points. This positive correlation between tech stocks and yield has been observed historically.
One of the strongest arguments for investing in these tech stocks is their expected earnings growth. Analysts predict a 20% increase in net income for this group in 2024. Profit forecasts have been steadily rising since the end of March, as analysts adjust to the impact of artificial intelligence on these companies.
Although Big Tech stocks have experienced recent declines, forward-thinking investors recognize the potential for significant gains in the long run. The expected slowdown in yield growth, combined with the projected increase in earnings, makes these stocks an attractive investment opportunity.
The stocks of the Big Tech companies have become significantly more affordable compared to just a few months ago. Currently, the seven major tech stocks trade at an aggregate price-to-earnings (P/E) ratio of 27, based on earnings estimates for 2024. This is a substantial decrease from the peak P/E ratio of 34 earlier this year. Although this P/E ratio is higher than that of the S&P 500, it is worth noting that the stocks' projected profit growth justifies this valuation.
The group's PEG ratio, which measures the P/E ratio divided by the earnings growth rate, further highlights the attractive valuations. Market analysts anticipate long-term annual earnings-per-share (EPS) growth of around 20.7% for these companies. With a P/E ratio of 27 times next year's EPS, the PEG ratio stands at approximately 1.3 times the expected growth rate. This is lower than the median PEG ratio of 1.9 times for the other 493 S&P 500 stocks.
Essentially, investors are paying less for each percentage point of earnings growth in Big Tech stocks compared to the rest of the market.
Microsoft serves as an exemplary case within the Big Tech sector. Currently trading at a P/E ratio of 28.2 times earnings, the company's PEG ratio is approximately 1.7. This indicates that it offers an attractive balance of earnings potential and valuation.
The company's growth trajectory heavily depends on its focus on cloud services and artificial intelligence (AI). Sales are projected to experience an annual growth rate of just under 16% over the next three years, reaching approximately $344 billion by 2026. Microsoft's flagship cloud product, Azure, is set to drive much of this growth, especially with its integration of AI capabilities. By continuously enhancing its products, Microsoft can increase subscription prices and gain market share. It is important to note that while revenue growth will incur rising costs for research and development and marketing, overall profit growth is expected to remain high.
Given these promising factors, it is clear that investing in Big Tech is a wise decision.