Tech stocks have taken a pummeling this month so far. If you’re a long-term holder of tech stocks and are feeling the pinch, you’re not alone.
Some of the tech stocks that I have a vested interest in have nosedived too.
For some of the companies that I have a stake in, the chart below shows how far off their recent highs their share prices are as of 14 May 2021.
It’s clear that the companies above have experienced sharp falls in their share prices from recent highs. The most prominent is Teladoc, which provides telehealth-consultation services – its share price has fallen by more than 50% from its peak.
But as a long-term investor, I am prepared to hold through these drawdowns. As long as I think that the stock can appreciate meaningfully over the longer term, I would not want to sell.
To me, what’s more important is that the stocks are cheap in relation to their long-term fundamental growth potential – which I think is the case.
In fact, with the recent drop in tech stock prices, many of our portfolio companies now trade at what I think is “value” territory.
Valuations
The table below shows the recent revenue growth of the same 12 stocks in the earlier chart.
Although the share prices of the companies listed above have fallen through the roof, their businesses have actually been growing rapidly.
Revenue growth for the most recently reported quarter was between 26% (Tencent) and 369% (Zoom). Although market participants are expecting a growth-deceleration going forward as comparisons start to become more difficult in the latter part of 2021, the recent revenue-growth numbers do speak to the solid execution of the aforementioned companies.
Even with the difficult comparisons going forward, many of these companies are still expecting double digit growth for this fiscal year.
Moreover, given the tailwinds in many of the industries that these companies operate in, I expect most, if not all of them, to continue to compound revenue at upwards of 20% per year for years.
After the recent tech sell-off, these stocks are also trading at much more palatable valuations. The chart below shows the price-to-sales ratios of the 12 companies.
The trailing price-to-sales ratios of the 12 companies have declined, as share prices have fallen while revenue has grown.
The current multiples look attractive to me, given the tailwinds behind the companies listed above. I won’t go into too much detail here on why I think these multiples make sense now but you can have a look at an article I wrote on price-to-sales valuations to get a better idea of my thought process.
What matters
Volatility is part and parcel of investing.
Rather than worry about drawdowns, I prefer to monitor a company’s fundamentals to see if it can recover. Based on what I’ve seen so far, the companies that I have a vested interest in (the 12 companies listed above are not exhaustive) may have seen their share prices fall, but their business fundamentals remain solid.
Even when they were at their recent highs, I felt that these stocks would be worth much more in a decade’s time. Today, as prices have fallen from their peaks, they can provide even more long-term upside potential.
Note: An earlier version of this article was published at The Good Investors, a personal blog run by our friends.
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Disclosure: Jeremy Chia owns shares of Mercado Libre, Tesla Inc, Tencent Holdings, Zoom Video Communications, Wix.com, Afterpay, Shopify, MongoDB Inc, Sea Ltd, Okta Ltd, The Trade Desk and Teladoc Health Inc.
