Tech stocks: pegged on some metrics, prices have yet to peak

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Investors patiently waiting for tech sector valuations to collapse following last year’s stock price slide will find themselves still on hold. The sell off prompted more companies to focus on profit rather than revenue growth. But excitement around artificial intelligence gave the industry a bump. Traditional valuation metrics such as forward price-to-earnings ratios remain far above average. 

The tech sector’s size means that this goes for the wider S&P 500 index too. The Shiller price-to-earnings (P/E) ratio, also known as the cyclically adjusted price-to-earnings ratio (CAPE), is a measure of inflation-adjusted earnings over the previous decade. At more than 31 it is down from the highs of late 2021 but still almost double the mean.

Enthusiasts for tech retort that innovative companies achieve high growth and so cannot be measured on traditional multiples. Companies like Microsoft and Nvidia have track records of introducing sizeable new businesses not expected by the market.

The PEG ratio, a metric that assesses growth, may offer a more precise picture of how pricey tech stocks are now. The higher the number, the more expensive the stock. As a rule, a ratio below 1.5 is considered fair value. 

Across the tech-heavy Nasdaq index the PEG ratio using three-year growth forecasts is high but not at a record. Electric car company Tesla, whose high p/e ratio has long repelled value investors, has a three-year PEG ratio of 1.57 times.

Nvidia’s share price has jumped by almost 230 per cent this year, prompting naysayers to forecast a reckoning. ARK Invest chief executive Cathie Wood defended her decision to sell Nvidia shares by declaring the Silicon Valley chip company was priced “ahead of the curve”. But Nvidia’s forward p/e ratio is 31.65, the lowest it has been in a year, thanks to forecast-beating quarterly earnings. Its PEG ratio just 0.75 times.

Take growth into account and some of the tech sector’s biggest stock movers are still fairly priced.