How much further can ASX 200 tech shares tumble? Macquarie weighs in

There could be more pain on the horizon for the tech sector…

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Key points

  • ASX 200 tech shares are the worst-performing group on the index during the market sell-off
  • But Macquarie believes these shares are still too expensive and is warning the sector could fall another 25%
  • The most expensive ASX tech share under its coverage is the Altium share price but this doesn’t mean there isn’t value to be found

ASX tech shares have taken a bigger beating than any other sector on the S&P/ASX 200 Index (ASX: XJO) during the market sell-off – and there could be more pain to come, according to a top broker.

The dire warning from Macquarie Group Ltd (ASX: MQG) comes after the ASX 200 tech sector crashed nearly 16% over the past month.

That’s worse than the 11% plunge by the second-worst performing Materials sector.

More downside for ASX 200 tech shares?

The tech meltdown is largely triggered by rising global interest rates. Growth shares are more sensitive to higher rates than others, and ASX 200 tech shares sit at the head of the growth table.

But bargain-hunters hoping to pick the bottom of the market may have to wait longer. Macquarie thinks valuations are still too high after analysing the performance of the sector over the longer term.

The broker used the enterprise value-to-sales (EV/sales) yardstick as a measuring tool. This is one of the preferred measures for the sector given that many are yet to turn a profit.

ASX tech valuations still looking expensive

While EV/sales multiples have come off their peaks following tech correction, they are still at a 33% premium compared to the 2010 to 2015 period, noted Macquarie.

Further, the current average multiples are still around double what they were in the early 2000s, as the dot-com bubble popped.

Based on Macquarie’s calculations, there could be a further 25% downside for ASX tech shares.

“History suggests a sector reset may take longer and be more painful than current market expectations based on consensus ratings and investor feedback,” said the broker. “We maintain our cautious outlook on the tech sector.”

Most expensive ASX 200 tech shares

But some ASX 200 tech shares are particularly at risk of a further sell-down. Macquarie flags the Altium Limited (ASX: ALU) share price as the most overvalued.

The broker’s one-year forward EV/sales estimate for the circuit board design software maker is 10.7 times. That’s 92% ahead of its historical trough and 49% above its historical average.

Is there value in the ASX tech sector?

However, there are three ASX 200 tech shares that are trading below their historical average and the average of the ASX 300 IT benchmark.

Mind you, this in itself doesn’t necessarily make the shares a “buy”. But in case you are wondering, the three are the Appen Ltd (ASX: APX) share price, Block Inc CDI (ASX: SQ2) share price, and Nearmap Ltd (ASX: NEA) share price.

Of the three, Block is the only one that Macquarie rates as “outperform”.

Motley Fool contributor Brendon Lau has positions in Block, Inc., Macquarie Group Limited, and Nearmap Ltd. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Altium, Appen Ltd, Block, Inc., and Nearmap Ltd. The Motley Fool Australia has positions in and has recommended Block, Inc. and Nearmap Ltd. The Motley Fool Australia has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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