As Internet Stocks Plunge, ‘Old Tech’ Finds New Friends
(Bloomberg) -- When it comes to tech stocks, new isn’t always better.
Amid a broad sell-off in internet stocks, investors have found a renewed appreciation for legacy tech names. Companies such as Microsoft Corp., Apple Inc. and Intel Corp. offer exposure to the industry’s higher-than-average growth rates, but without the outsize valuations and risk that have marked momentum favorites such as Amazon.com Inc., Facebook Inc., and Netflix Inc.
As a key driver of the broader market sell-off, technology stocks are on track for their biggest monthly drop in a decade. While legacy names haven’t been immune, they’ve held up better than modern-day bellwethers.
Apple, for example, has fallen 4.2 percent over the month of October, while Intel has fared better thanks to a post-earnings rally on Friday. Microsoft is off 6.5 percent, but that’s almost half of Facebook’s 12 percent collapse over the same period. Amazon is on track for its worst monthly performance in almost 10 years and Netflix has shed a fifth of its value.
The broad-market sell-off “is based on worries about global growth, so if you’re priced for very rapid growth, or if investors start to worry you can’t deliver that growth, you become vulnerable,” said Bill Stone, who helps oversee $7.7 billion in assets as the co-chief investment officer at Avalon Advisors. “If you’re a high-growth stock, those expectations come with their own dangers.”
On Friday, both Amazon and Google-parent Alphabet Inc. plummeted in the wake of disappointing revenue growth; Stone said they had been “priced for perfection” that they didn’t deliver.
Legacy names’ more modest valuations may have insulated them from the worst of the carnage. For example, Apple’s price-to-earnings ratio is 19.8, compared to 11.3 for Intel and 20.1 for the tech sector. Microsoft’s P/E is 27.6 while Amazon goes for more than 101 times earnings.
“Microsoft may not be cheap at current levels, but it certainly looks cheap compared to Amazon, especially with the growth it’s putting up,” Stone said in a phone interview.
While most new tech companies don’t pay out dividends, legacy names often do, providing another positive element for income-seeking investors.
“Dividends have become a big part of the story,” said Alec Young, managing director of global markets research at FTSE Russell. “The old bellwethers probably have less upside potential than the new ones, but they also have less downside risk, and right now the market is all about managing downside.”
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