US tech shares, and UK tech shares for that matter, have been some of the best performers over the past couple of years. Take the NASDAQ (a tech heavy index). Two years ago it was trading at 7,400 points. Today, even with the recent sell-off, it sits at 12,600 points. This represents a gain of just over 70%. Over one year, it’s up around 58%. But the past couple of weeks have not been good, for some very valid and important reasons.
Why the drop?
Over the past month, the NASDAQ index is down around 10%. It’s home to a lot of the big US tech shares, including Tesla, Apple and Alphabet. If we exclude the stock market crash last March, over the past couple of years, the tech names have moved in an almost unbroken line higher. So this drop in the short term is something I need to take note of.
One reason tech has taken a hit is due to the reopening of global economies and easing of lockdowns. Since lockdown, I’ve spent a lot more time in front of my computer. My reliance on services such as Amazon Prime, Google, Netflix, YouTube and more has increased substantially. If I could get back out and about, my usage would drop. I’d more likely shop in-store instead of ordering online. I’d spend less time watching Netflix and more time with friends.
Overall, US tech shares may have to readjust to slightly lower levels of uptake from consumers, hence the drop.
A second reason for the sell-off is chatter around interest rates in the US and UK. Don’t get me wrong, I don’t expect rates to rise any time soon. But the bond markets are rising. For example, the 10-year UK yield is now at 0.7%! In the US, it’s at 1.5%. This is a market estimate of where it believes interest rates will be in 10 years’ time. These yields have risen a lot in recent weeks.
Since tech companies often have large amounts of debt, higher yields make it more expensive for the companies to raise new cash. As a result, this could raise interest costs and reduce profits.
Should I buy US tech shares now?
I think the above reasons are completely justified in bringing US tech shares lower. The question is whether to buy the dip or not. Personally, I find it hard to value these tech companies based on traditional measures. For example, the Tesla P/E ratio currently sits at 955! Given that investors look more at the potential for high future profits, some claim this ratio isn’t relevant.
I would look to buy this dip, but would be selective in which stocks I buy. I wouldn’t buy Tesla shares, but would look to buy shares in Apple. I feel Apple is a more sustainable and a lower-risk business than Tesla. The financials of Apple and the track record also make it a more viable stock for me to buy based on the risk I’m happy with.
