The Motley Fool

Is the tech sector a buy or a sell at these prices?

The technology sector is one of the most exciting industries that investors can choose, I can completely understand why people want to jump on most tech shares even with the high valuations.

The principle idea is that that once the technology company has developed its product it can easily roll out its software to more clients at very little cost. Therefore, profit margins and the profit can rocket upwards because most of the new revenue falls to the bottom line.

However, this doesn’t necessarily mean that all ASX tech stocks are worth a lot more than regular shares. Indeed, the American tech shares like Facebook, Alphabet (Google) and Microsoft are trading on much more reasonable valuations in price/earnings ratio terms.

Some of the best performing ASX tech stocks in 2017 like Altium Limited (ASX: ALU), WiseTech Global Ltd (ASX: WTC) and Aconex Ltd (ASX: ACX) all trade at much higher multiples of earnings than the ASX average.

There is a lot of growth factored into the current prices, some tech shares may deliver on those expectations and some may not, leading to potentially large price drops. That’s why WiseTech has been one of the worst performers since the global markets started becoming volatile.

Interest rates rising affects the exciting shares more than others because the unsure growth of years in the future is worth less and downgraded compared to the guaranteed returns of rising bond rates today.

Foolish takeaway

In the short term the market may punish some tech stocks for getting a bit too ahead of themselves, particularly if this reporting season doesn’t deliver on the expectations.

However, I believe in the long-term that a lot of the tech stocks will grow into their valuation, particularly ones predicting strong organic growth over the next few years like Altium.

If you’re not a believer in tech stocks, then these top shares could be worth buying instead.

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Motley Fool contributor Tristan Harrison owns shares of Altium. The Motley Fool Australia owns shares of and has recommended ACONEX FPO. The Motley Fool Australia owns shares of Altium and WiseTech Global. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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