First, it should be said that I often hold positions as a swing trader, but fundamental data is still a very important part of the process. I also look at a range of other factors if I decide to enter through an options strategy, while technical analysis plays a role in timing the entry.
The analysis worked roughly like this, without going into the details:
The tech sector is first valued as a whole, after which the higher-quality companies are screened out. Valuations are compared relative to the sector through EV/EBITDA, P/E and other multiples, with the sector median serving as a natural reference point.
The analysis then goes one level deeper, looking at the financial quality of each company. Leverage, margins, profitability, cash flow and capital structure become important in determining which companies actually deserve to trade at a premium.
Once the most interesting companies have been identified, the analysis goes deeper into earnings reports and the underlying data. The focus is on understanding the earnings profile and making reasonable assumptions about future cash flows. Valuation is based partly on discounted future cash flows, together with relative multiples and other relevant valuation methods.
When the valuation is then compared with the current market price, the result is interesting. Both Meta and TSMC appear somewhat overvalued relative to estimated fair value, although Meta looks considerably more attractive.
At the same time, assumptions are still just assumptions. Small changes in growth, margins, cost of capital or terminal value can have a significant impact on valuation. Tech also needs to be viewed in the context of its higher volatility and generally positive beta. Higher growth potential does not come for free, and a higher multiple also means greater duration and more sensitivity when market risk appetite deteriorates.
That is why it is difficult to simply look at one multiple and conclude that a company is cheap or expensive. Quality, growth, return on capital, balance sheet strength and the price being paid for that growth all have to be considered together.
Conclusion
Tech remains an extremely interesting sector, but current valuations are difficult to ignore. A lot of the quality is already priced in, and margins of safety are not particularly generous.
If buying a tech company at these levels, Meta is still the most interesting alternative. I am buying it despite the risk involved and for the vibes. Sentiment is bad, creates op.