If one pokes around a bit, it's still possible to find some tech stocks here and there that still don't look too expensive.
But considering how much the Nasdaq has run up in recent months, how complacently bullish investor sentiment has felt in recent weeks and how many tech names look at least a little expensive at this point, there's a case to be made for waiting until a correction arrives before going bargain-hunting.
With one day left in 2019, the Nasdaq is up 35% on the year, and by my count, more than 75 tech companies with $1 billion-plus market caps are up over 50%. This list includes six tech stocks with $100 billion-plus market caps -- Apple (AAPL) , Microsoft (MSFT) , Facebook (FB) , Alibaba (BABA) , Nvidia (NVDA) and Taiwan Semiconductor (TSM) -- along with a long list of smaller chip companies, enterprise software firms and high-growth internet companies.
In addition to the magnitude of these 2019 gains and the multiple expansion that they've yielded, the almost non-stop moves higher seen this fall by many tech names, including many companies that investors were far less positive on earlier in the year, should make would-be buyers think about waiting for better entry points.
Consider the big run-ups seen over the last couple of months by Apple and Tesla (TSLA) -- two names that are very different in many respects, but which both traded at depressed levels earlier this year due to investor fears that now feel overblown.
In Apple's case, markets were too pessimistic about demand for Apple's 2019 iPhone lineup -- and perhaps more generally, the durability of the iPhone franchise -- and also didn't fully appreciate the growth runway that the Apple Watch and AirPods had in front of them. In Tesla's case, in hindsight, investors were too negative about the company's near-term profit and cash-flow outlook as its sales mix shifted towards cheaper Model 3 trims.
But all the same, each company has seen quite a lot of multiple expansion this year, and (outside of positive trade headlines) the expansion that has occurred in November and December has mostly happened in the absence of major news. Apple's forward P/E of 22 is its highest since 2010, when the Great Recession depressed analyst estimates. And with the caveat that it's tough to predict what kind of cash flows a firm like Tesla will produce a few years from now, Elon Musk's company carries an enterprise value (market cap plus net debt) equal to 25 times its 2022 free cash flow consensus.
Chip stocks -- a group of stocks that I've generally been positive on for much of this year, and which investors had trouble giving away in December 2018 as trade war and cyclical fears ran high -- have been behaving in much the same way the last couple of months. Multiples have continued to rise against a backdrop of diminished trade war fears and improved expectations in areas such as cloud capex, memory prices and chip equipment demand. The Philadelphia Semiconductor Index (SOXX) is now up 59% on the year.
For all of these companies, as well as a slew of other tech names, a "fear of missing out" (FOMO) mindset seems to be contributing to recent gains, as investors and analysts who were scared to be bullish at lower levels have had a change of heart after the headlines have become more positive. Throw in light end-of-year trading volumes and maybe some window dressing by fund managers, and you have a recipe for a "melt up" rally to close out the decade.
But time and time again, investor sentiment has shown a knack for swinging in the opposite direction following a period of complacent bullishness. There doesn't need to be significant macro deterioration or a wave of massive earnings disappointments for the tech sector to correct following a run-up such as the one we've just seen.
Some negative macro headlines and/or election worries could do the job as 2020 gets going. A spate of negative, sector-specific headlines related to things such as weakening PC demand, softer-than-expected 5G phone sales or slower IT spending growth (just to throw out some possibilities) could also potentially do the job.
If such a correction arrives, look for many of the recent "FOMO" buyers to head for the exits. And that in turn is likely to create much better buying opportunities for many quality tech names than are available today.