Why I remain wary of US tech stocks (even after recent updates)

This week has seen a number of US tech stocks report strong earnings, including some of the famous FAANGs, as well as older tech companies such as Microsoft. It’s widely accepted that the pandemic has been a massive tailwind behind these share prices. The pandemic has been a catalyst for trends that were already happening – the rise in e-commerce and more flexible working, to name just two examples. But is that enough to justify share prices rising so rapidly in such a short space of time?

I believe a whole new generation of investors are also getting involved in the markets. The popularity of apps like Robinhood in the US and Trading 212 here in the UK show this. The bizarre GameStop share price rise this week is also evidence of this trend, I think.

The downside of this market exuberance is the possibility that the share prices of well-known, popular companies may rise beyond what I would consider a fair price.

A bubble or just a high price for high-quality companies? 

I don’t know if there’s a bubble. But the view among some — that these tech shares can only go up in value –makes me nervous. In my experience, investing is more complicated than that. Among US tech stocks, there will be winners and losers. I think the winners are likely to be those with a wide moat – meaning high barriers to entry – and those that continue to innovate and keep customers happy. That potentially makes Alphabet, Amazon, and Microsoft among my top picks if I was to put my own money directly into a US tech stock. Although I’m reticent to do so.   

The pandemic has provided a tailwind that might eventually fizzle out, meaning I wouldn’t want to be buying shares at too high a price. I’m keen to make sure the price-to-earnings ratio, and other valuation metrics, makes sense. I’d want the share price to give me a margin of safety.  

Investing beyond the FAANGs and other US tech stocks like Tesla

I do think some of US tech stocks are very strong and could continue to do well. As ever, I prefer to take a long-term view and invest at a sensible, fair price.

One potential way to diversify my risk is to invest in a fund or trust. They can buy a wider pool of investments. Or even buy an S&P 500 ETF, for example, which can track the US market. That’s how I plan to ride the tech wave without putting all my eggs in one basket. I’m more comfortable with this, because I remain aware of the risks these companies face, especially when it comes to their valuations. 

At the end of the day, all shares carry some risk. For me, although the growth in US tech stocks has been impressive, I remain wary of buying into them. Especially now after such strong share price rises.