Tech stocks have recently suffered a sharp decline, but are unlikely to remain depressed in the long term. The SPDR Tech ETF (XLK) fell 3.4% this week to $223, significantly down from the peak of $237 in July. Investors have ample reasons to avoid former favorites. Microsoft's (MSFT.O) earnings report, while solid, is not enough to support its nearly 30 times price-to-earnings ratio valuation. The once-coveted supermicro computer company saw its stock plummet nearly 40% within two days after announcing its auditor resigned due to accounting issues, raising market concerns about potential overheating in the AI sector. Additionally, for the group of stocks that have risen 40% in the past 12 months, market buyers may be running low.

However, Amazon (AMZN.O) rose 5.2% in after-hours trading on Thursday after its third-quarter earnings exceeded expectations; Apple (AAPL.O) slightly fell 0.4%, also exceeding market expectations.

The yield on the 10-year U.S. Treasury bond has risen 0.63 percentage points since the day before the Fed's rate cut on September 18, with continued economic growth, and policies proposed by both presidential candidates potentially exacerbating inflation. Rising long-term bond yields diminish the value of future profits and also exert pressure on valuations.

Perhaps the pressure is too high. The current 12-month forward price-to-earnings ratio for tech ETFs is 28 times, down from the peak of 31 times in July. If bond yields fall, it could drive valuations back up, but even if the multiples do not change, earnings can still play a role. According to FactSet, profits in the tech sector are expected to grow at an annual rate of 18% over the next two years, driven by 9% sales growth and billions of dollars in stock buybacks. In other words, despite recent weakness, there is no issue with the sector itself.

"Tech stocks have risen significantly this year so far," wrote Mizuho Securities analyst Jordan Klein, "moderate selling is nothing to worry about."

This could also be an opportunity. Although Meta Platforms (META.O) belongs to the communications services sector, it has not escaped the weakness of tech stocks. Its sales grew 19% to a better-than-expected $40.6 billion, as AI features enhanced user engagement and increased ad impressions—along with the amount the company paid for them. Spending growth lagged behind revenue growth, allowing profit margins to improve, with profits increasing by 37% to $6.03 per share, far exceeding expectations.

This did not satisfy investors, and the stock fell 4%. The issue is that Meta is expected to further increase spending in 2025, which could compress profit margins as sales growth slows. In fact, management will significantly invest next year to ensure the platform's leading position in users and the market, but profits should accelerate once spending slows.

"Meta is in a critical product cycle while achieving over 20% revenue growth, enhancing engagement through ad targeting and content recommendation engines," said Evercore ISI analyst Mark Mahaney, who maintained an 'outperform' rating.

Additionally, Meta's price-to-earnings ratio is only 23.2 times, lower than its three-year peak of 25 times, and only slightly higher than the S&P 500's 21.8 times, despite its faster growth.

This is one of the tech stocks we would choose to buy during a dip.

Article reprinted from: Jinshi Data