UBS sees the recent sell-off in tech stocks as a bargain-hunting opportunity for long-term investors. The sell-off is being driven by a general shift from large-cap companies to smaller and mid-cap names. UBS cites attractive valuations, solid fundamentals and fading technicals as reasons to stick with large-cap tech companies.
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This month’s sell-off in tech stocks represents an opportunity for long-term investors to buy low, according to a Monday note from UBS.
The sell-off was exacerbated by investors swapping large-cap stocks for small- and mid-cap stocks, raising questions about whether a long-running trend of big tech stocks outperforming the market is over.
But UBS said the recent decline in tech stocks is temporary and should become clear when big tech stocks report their second-quarter results later this week.
“Market volatility will remain with major company earnings reports still scheduled for this week, but the technology sector should find support in the coming weeks and regain its lead,” UBS said.
UBS’s confidence stems from three factors: attractive valuation, fundamentals and technicals.
“Tech stock valuations have become attractive again.”
UBS said the technology sector has experienced a 10% sell-off nearly every year for the past decade, and the recent 9% drop in the Nasdaq 100 is not unusual.
A healthy sell-off in tech stocks has made valuations in the fast-growing sector more attractive, especially compared to previous bubbles.
“While tech stocks look expensive after this year’s rally, price-to-earnings multiples are still much lower than in the dot-com era, when the quality of earnings for many tech stocks was much lower,” UBS said.
“Tech fundamentals remain strong.”
Apple, Amazon, Microsoft and Meta Platforms are scheduled to report earnings this week, and UBS expects the technology sector to post a 20-25% increase in net profit in the second quarter.
“Today’s tech giants also offer high profit margins, strong free cash flow and solid balance sheets, which are positive factors amid slowing economic activity,” UBS said.
This growth is set to continue for many years, as the AI revolution will require massive investments in architecture, including Nvidia’s GPU chips and new data centers.
“As Alphabet CEO Sundar Pichai noted, ‘the risks of underinvestment are significantly greater than the risks of overinvestment,'” UBS stressed.
“The technical factors supporting rotation are likely to fade.”
Short squeezes, call option trading and bank hedging have fuelled a rotation into smaller caps, but this trend won’t last forever, UBS said.
“The positioning impact for rotational trades will likely fade quickly, though that would typically happen after about a month,” UBS said. “We therefore believe the environment remains favorable for quality tech stocks and believe investors should ensure adequate exposure to companies benefiting from AI both in the U.S. and overseas.”
