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Tech stock sell-off: Opportunity, or the start of a crash?

There can be little doubt that the overhyped valuations of Australia’s tech companies are coming back to reality, and investors who got caught up in it will be feeling the pain. In the last month, each of the top three internet companies on the ASX have seen a falling share price. Let’s have a look at what’s happening before we discuss any opportunities that may emerge.

Seek Limited (ASX: SEK) is down 11%, Carsales.com Limited (ASX: CRZ) is down 9.3%, and REA Group Limited (ASX: REA) is down 11.2%.

As well as these superstars, there are also some more speculative internet and tech companies trading on the ASX. These have been sold down even more severely in the last month.

iCar Asia Ltd (ASX: ICQ) down 10.5%, iBuy Group Ltd (ASX: IBY) is down 13.2%, iProperty Group Ltd (ASX: IPP) is down 23%, and XERO FPO NZ  (ASX: XRO) is down 30%.

This goes to show that while it’s dangerous to invest in hyped segments of the stock market, it’s even more dangerous to invest in hyped companies that don’t even make a profit. The recent sell-down is time for reflection, because not long ago many would have been feeling jealous that others were making massive gains. At least, I certainly was, judging by comments I made to a friend just last month:

“I am having major rage at the fact that I sold my iCar Asia shares… now my one holding that had exposure to the tech hype is gone.”

I share this to illustrate my point that investors can’t help but feel a whole range of emotions. Clearly, when I wrote those words I was feeling jealous that my portfolio wasn’t shooting up with the tech hype. Now, (lo-and-behold) I’m beginning to feel more comfortable with that fact.

Having said that, the sell-off seems to have spread to some of the telcos, which have also enjoyed a very strong run over the last 12 months. Based on valuations, I’ve been lightening my holdings of my favourite telcos, though I think they are far more attractively priced than the tech stocks mentioned in this article.

For example, TPG Telecom Ltd (ASX: TPM) is up 7.5% over the last month, but fell 5.5% yesterday, and Vocus Communications Limited (ASX: VOC) is up 3.6% over the last month, but fell 4% yesterday. I was lucky to sell down at the right time, having just parted with my last TPG shares six days ago. However, my remaining Vocus shares are a long-term hold, and if the tech sell-off causes investors to drive down the share price of these two companies, I would consider buying shares in either or both of them.

Meanwhile the newly listed Australian tech stocks are also down over the last month, suggesting that their owners might have been quite clever when they chose to list the companies in 2013.

iSelect Ltd (ASX: ISU) is down 11.6%, Freelancer Limited (ASX: FLN) is down 21%, and Ozforex Group Ltd (ASX: OFX) is down 9.5%.

In my view, the sell-off we’re seeing at the moment must continue, because the valuations of many of these companies have lost touch with reality. However, Seek, REA Group and Carsales.com are all companies I’d love to add to my portfolio, and it’s already on record that I sold Seek way too early. I would encourage long-term investors in these three companies not to panic as the share price falls, because nothing has changed in the underlying business. Having said that, I’ve viewed each of these companies as too expensive to buy for quite some time, especially REA Group, which has been priced for ridiculous growth.

Foolish takeaway

TPG, Vocus, Seek, Carsales, and REA Group are all priced for strong growth, well into the future, but I could easily envisage their shares falling to attractive prices. After a fall of 20% (unlikely perhaps, but possible) any of the above would be looking pretty good, because a lower share price won’t change the fact that those companies will likely grow.

In my view, the more speculative stocks in this article have a long way to fall before value investors put a floor under the price, and I certainly will do my best to resist the temptation to buy before they get back into my range – particularly as the share prices may well bounce some time soon. Of that speculative group, I still like iCar Asia (at below 90c), I would still be a very long way from buying any of the others.

For now, I think investors should watch and wait. The NASDAQ Index in the USA is down just over 5% in the last month, but it could fall further. If it does, Australian tech stocks are likely to follow. Either way, Aussie tech stocks have quite a way to fall before they become attractively priced to value investors, and that could take months to play out.

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Motley Fool contributor Claude Walker (@claudedwalker) owns shares in Vocus Communications and always welcome feedback.

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