Most share prices have fallen sharply this year. Particularly the prices of technology stocks have plunged most steeply, making tech giants such as Amazon, Netflix and Meta shed 48%, 58%, and 70% of their value. Are the tech stock prices low enough now to be a good deal for investors?
The original value investment theory started by academic and author Benjamin Graham, and followed by Warren Buffett relied mainly on two measures: the ratio of share price to earnings (P/E), which compares the market value of a firm with its profits; and price to book value (P/B), which compares a share price to the value of a company’s assets, such as property, equipment, and inventories. Graham liked firms to be priced below 15 times for earnings and 1.5 times book value.
However, at the beginning of the year, the share prices of Alphabet, Amazon, Apple, Meta, and Netflix were on average 38 times earnings and 12 times book value. The equivalent figures for the Russell 1000, a broad index of stocks, were 24 times earnings and four times book value. Such a high price to earnings and price to book value would not have qualified as a good deal for Graham.
Nevertheless, some experts believe that applying the idea of value investing to tech stocks is too simplistic. For one, high-tech companies have relatively few physical assets that are captured by book value and many intangible ones—such as software and human capital. High-tech firms have also tended to be fast growers, which means that measuring their price against present earnings risks underestimating future profits.
To read more on the subject, follow the link: https://www.economist.com/finance-and-economics/2022/11/10/are-tech-stocks-now-good-value?