Tech stocks as a class are going through their most challenging times since the 2008-09 financial crisis. Stocks like Meta Platforms have lost more than half their value over the last 12 months. Moreover, the ARK Innovation ETF, which tracks growth tech stocks, has dropped by more than 65%.
Admittedly, companies such as IBM and Apple have fared better in this tech downturn. Nonetheless, the massive declines in many tech stocks warrant looking at both the bull and bear cases for them to see whether investing in this category still makes sense.
Why investors should consider tech stocks now
Despite painful losses over the last few months, history has shown that it pays for investors to keep their faith in the tech sector. This past-performance factor proves especially true with one of tech's more prominent names, Amazon (NASDAQ: AMZN). The company grew quickly following its initial public offering (IPO) in May 1997 and reached a split-adjusted high of $5.65 per share in December 1999.
However, amid the dot-com collapse in 2000 and 2001, investors dumped stocks, which took Amazon to a split-adjusted price of $0.28 per share by October 2001. It would not return to its 1999 high until October 2009, a wait of nearly 10 years!
Still, Amazon sells for around $110 per share as of the time of this writing. That indicates that buying high-quality stocks could bring outsize returns over time, returns that come in even higher when buying at lower prices.
This also brings to mind more recent highfliers such as Roku and Shopify, which have experienced considerable price declines. After the sell-off, Roku now trades at around four times sales. Also, Shopify has fallen below a price-to-sales (P/S) ratio of nine, a six-year low. Such companies have not yet proved their ability to succeed. Still, like Amazon in past decades, these stocks could not only return to their previous highs but also possibly exceed them as conditions improve.
The dangers of tech investing
However, investors should also bear in mind that massive declines are no guarantee of a recovery. For every Amazon, the market has experienced several stocks like Pets.com, which began 2000 by sponsoring a Super Bowl commercial. But by November of that year, it was out of business and wiped out its stockholders.
Other stocks could survive but fail to reach their expected potential. One example is eBay (NASDAQ: EBAY), which had once challenged Amazon for e-commerce supremacy. Over time, eBay floundered as sellers found other e-commerce sites easier and cheaper to use.
Nearly 24 years after its 1998 IPO, eBay has reached a market cap of only $24 billion. This is a small fraction of Amazon's $1.1 trillion market cap, and eBay's former subsidiary, PayPal Holdings, dwarfs it in size with an $85 billion market cap.
Another factor is valuation. Despite the drop in tech stocks, many still sell for pricey multiples. Data cloud company and Warren Buffett stockSnowflake (NYSE: SNOW) is one example. It offers an obvious value proposition as a safe, accessible, and reliable data repository. Also, its year-over-year product revenue growth of 106% in 2021 bodes well for that potential.
However, it sells for 28 times sales despite losing two-thirds of its value. That is significantly cheaper than the 180 multiple at which it traded in December 2020, but the average P/S for the S&P 500 is about 2.4. Consequently, the company could easily have trouble justifying its current valuation in a climate where tech stocks struggle to gain traction.
Should you invest in tech stocks?
Given the history of tech stocks, investors should stay in the sector. Amid the volatility, history has proved the resiliency of these stocks.
A better question is: What type of tech investing should you pursue? Many investors are risk-averse. Assuming that these tech investors do not choose an index or ETF, they should probably lean toward an established giant like Apple or Amazon.
Nonetheless, investors with a higher degree of risk tolerance might want to consider the growth stocks. Such stocks require understanding a company's offerings, competitive advantages, and market leadership position, as well as how these variables could improve or decline.
Admittedly, many of these growth stocks will likely stagnate or even fail. Hence, investors should not pin all of their hopes on any one individual stock. But if they can find the stocks that will succeed, the due diligence could mean buying future tech giants at low prices.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Will Healy has positions in PayPal Holdings, Roku, and Shopify. The Motley Fool has positions in and recommends Amazon, Apple, Meta Platforms, Inc., PayPal Holdings, Roku, Shopify, and Snowflake Inc. The Motley Fool recommends eBay and recommends the following options: long January 2023 $1,140 calls on Shopify, long March 2023 $120 calls on Apple, short January 2023 $1,160 calls on Shopify, short July 2022 $57.50 calls on eBay, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
