Think Value First! - Why substance is also important for tech stocks

Companies such as Google, Facebook and Apple are among the shooting stars, as they have been able to develop entire markets from scratch and make old business models obsolete. After years of strong performance and good results, many investors are asking themselves what will happen next? Will the so-called growth stocks continue to be among the winners in the coming years?

There is no doubt that technological development will progress and new business models will replace old ones. Likewise, every investor dreams of having one of these new jewels in his portfolio. However, and this makes things difficult, these are not initially recognizable as real opportunities. It always takes a certain amount of time for market participants to realize the potential that lies dormant in a company. But even then, it is usually not too late to get into these stocks. The question now remains, however, what should investors do who have already benefited from the technology boom for years? Has the time come to sell tech stocks? Should one just leave the party when things are at their best?

From a portfolio manager's perspective, the answer to this question could be yes, but as always, there is a catch.

Every share is worth as much today as the projected future cash flows of that share. And, of course, all investors and portfolio managers are watching interest rates like a hawk, because every rise in interest rates, and thus in discount factors, has an impact on the value of a stock, especially when it comes to growth stocks whose earnings lie in the distant future. Investors respond particularly jittery when it comes to these stocks, but rightly so. Above all, investors must ask themselves one question: Am I willing to pay a high price today for supposedly higher future growth? After all, the higher the price paid today, the lower the investor's future returns. It's a good thing that there are experts with over 20 years of experience in the DNB technology team who can answer this question for the investor.

We are currently seeing a rise in long-term interest rates, which is also associated with higher inflation rates expected by market participants. In such a scenario, growth stocks will have a hard time. Investors prefer to look at the short term and look for companies that have profitable business models with stable cash flows.