Internet stocks have been underperforming the market so far this year, but given that valuations in the space remain elevated, there are still few bargains, says Morningstar's Norm Young.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Tech stocks have been hit hard recently, and I am here with Norman Young, a senior equity analyst on Morningstar's tech team, to take a look at what's been hit the hardest and if it's opened up any opportunities.
Norman, thanks for joining me today.
Norman Young: Thanks so much for having me.
Glaser: First, put the sell-off maybe in a little bit of context. How much has the tech sector really gone down recently? How does it look compared with the broader market?
Young: So relatively [the tech sector has gone down] actually a little bit. Year-to-date the Nasdaq is down about 3% and that’s relative to the S&P 500 which is down about 1%. So it's down quite a bit, but the Nasdaq's pretty tech-heavy, so that makes sense.
Glaser: What's driving this? Is it all tech stocks are really being sold off evenly, or is it certain Internet companies that are getting hit the hardest.
Young: That’s a good question. It's actually certain companies are being hit the hardest. Most companies are coming down a little bit, but it's social media. It's also things like biotech, things like Facebook and Twitter, even Tesla--things really what were known as momentum stocks last year are down quite a bit this year.
Glaser: What do you think is driving this? Is it valuation? Is it the fundamentals of these businesses? Why are investors all of a sudden falling out of love?
Young: The good news is it's not fundamentals because the fundamentals of the businesses haven’t really changed and a lot of that is just because investors expect a lot out of these companies. I think it it's just really a combination of valuation. Maybe some macro fears. I mean if you look at it this way, Facebook at its peak last year was trading at about 100 times earnings. Quite a ways to go. Nasdaq in general is trading at about 35 times earnings. S&P is about half that, about 17 times earnings.
Glaser: So you think that this might not be totally done yet or that we could see potentially more volatility in this space?
Young: Yes, when you think about it in terms of price and valuation, yes, there is quite a ways to go before price catches up with valuation or vice versa.
Glaser: Looking at it from our fundamental research, where do we see this sector sitting in terms of price to fair value ratio?
Young: We see it's still a little bit above fair value. We've certainly had a few stocks that have come right into fair value. But there are not a lot of bargains out there right now.
Glaser: If you did think you wanted to buy on the dip and are looking at opportunities, there aren't any options now, or are there some places to take a look?
Young: We have a handful of stocks that we like right now. Altera, which is in the programmable logic devices sector. We also like MSCI. We like TIBCO which makes middleware and business analytic software, and we also like American Tower.
Glaser: But it certainly doesn’t sound like any of these Internet stocks have sold off to the point where you should be getting excited about Twitter or Facebook or Tesla or anything like that.
Young: Not quite yet.
Glaser: Norman, I appreciate the update on this sell-off.
Young: Thank you so much.
Glaser: From Morningstar, I am Jeremy Glaser.
