This feels like a very complicated moment in time for tech stocks.
On one hand, following an 11% drop for the Nasdaq from its early-September high, valuations have gotten more compelling for a number of quality tech companies that have secular growth drivers and are competitively well-positioned.
I previously talked about chip equipment stocks, Chinese tech stocks and moderate-growth software companies being places for bargain-hunters to look, and also brought up (following recent pullbacks) Slack (WORK) and II-VI (IIVI) . At this point, Amazon.com (AMZN) and Facebook (FB) -- both of which are down 17% from their recent highs, and whose near-term earnings are depressed by aggressive spending -- are two other names that are starting to look intriguing, even if their valuations are perhaps still a little rich.
And though COVID-related macro risks definitely haven't gone away, it's worth noting that macro and industry-specific demand signals by and large still look encouraging for tech heading into seasonally big Q4.
Consumer tech spending remains quite elevated, with boom times continuing for notebook/tablet vendors and gaming and e-commerce firms. And (though still soft in some areas, particularly around on-premise hardware/software spending) corporate IT spend is showing signs of stabilizing, with many SaaS and cloud services firms continuing to report strong growth.
All of this, it's worth adding, has been going on even though the $600-a-week unemployment insurance boost expired at the end of July, and a deal hasn't yet been reached on a new stimulus bill (just maybe we'll get one before Election Day).
But at the same time, it's hard to ignore how many growth-stage tech companies -- think names such as Zoom (ZM) , Shopify (SHOP) , Tesla (TSLA) , Datadog (DDOG) , Wayfair (W) and newly-public Snowflake (SNOW) -- still sport nosebleed valuations, even if they've pulled back some from their late-August and early-September highs. And it's hard to ignore how much the run-ups such companies have seen have been fueled by a massive surge in stock and options-buying among retail investors and momentum traders (SoftBank says hello).
In a way, this is something of a Nifty Fifty-type environment within tech, where markets are assigning sky-high multiples to select names whose growth stories set their imaginations alight, but are being more cautious when it comes to valuing many other solid (if often slower-growing) companies.
When a speculative frenzy like this ends, it tends to end with a thud, as those who let their emotions drive their decision-making on the way up also let their emotions (and perhaps also margin calls) drive their decision-making on the way down. And given how much correlation there tends to be in the movements of tech stocks across different industries and valuation profiles, cheaper names generally aren't unscathed as the carnage unfolds.
This in turn presents another near-term risk (outside of macro uncertainty) for anyone looking to buy more reasonably-valued tech stocks at this juncture. Particularly since the market's mood has changed since the start of the month.
Yes, certain quality tech companies are arguably reasonably-priced right now. But it's definitely not hard to envision a scenario where a broad selloff featuring major declines in more richly-valued peers leads some of those "reasonably-priced" names to turn into screaming bargains. And perhaps even make one or two of the high-valuation companies suddenly look tempting.