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Wahlstrom: Why the tech sector is overvalued
The faster the rise, the quicker the fall. That’s the warning that Pete Wahlstrom, Director of Technology Research at Morningstar, issues surrounding the tech sector and certain high-growth stocks.
Although the technology sector is up 8 percent this year, Wahlstrom believes that the industry is overvalued by 10 percent. The hype surrounding household name tech companies has contributed to an environment of over-inflated stock values, despite disappointing returns. Proven companies like Apple and HP have continued to exhibit measurable growth; meanwhile newer companies like Twitter and LinkedIn are stumbling as expectations begin to settle to more realistic levels.
Banks such as Wells Fargo have warned against continued investing in high-growth tech companies like Twitter. Investor’s hopes for the company caused its stock price to nearly double after its debut on the NYSE. To date Twitter’s stock price is down 45 percent as interest and expectations for the company have dwindled. The company reported that its 255 million monthly active users are using the service less and less.
Wahlstrom provides an example of the hype surrounding tech stock by highlighting Tableau, a software company specializing in data visualization. In two months the company’s stock price jumped 40 percent, and just as quickly as it rose fell 40 percent. Instead of looking for high-momentum stocks Wahlstrom prefers to explore the potential of companies that have long-term potential, despite slow or low growth levels at the moment. One company that Wahlstrom believes in is TIBCO, the software provider as strong long-term potential according to Morningstar due to the company’s exposure to growing markets.
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