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Tech's Bill Is Coming Due. Investors Aren't the -2-

Barron's · 01/06/2023 11:12

First, be careful about valuations. The Federal Reserve has made it clear that rates are going to rise further, which will put a lid on stocks. Investors should avoid crude measures like revenue multiples and instead look for companies that have an obvious near-term path to strong profit growth.

Second, avoid companies that have a structural problem with stock-based compensation and profitability. Nathanson specifically calls out Snap (SNAP) and Roku (ROKU).

"The problem is they don't have natural, generally accepted accounting principles--based earnings. They must use stock-based comp to pay people, " he says. "It's a very deadly cycle. All the employees are used to getting paid stock-based comp, the stock falls, and they have to issue more to make people whole, which is dilutive to investors."

Snap declined to comment on the stock-comp issue. Roku didn't respond to a request for comment.

Finally, look to play trends, but only through profitable companies. Daniel Ernst, a senior analyst at Robeco Institutional Asset Management, says the market has entered a cost-conscious phase where it won't underwrite unprofitable growth. But he believes that finding profitable companies early in secular long-term growth trends can still work. Some of his favorites are cloud computing, e-commerce, payments, and the transition to sustainable energy.

Ultimately, the turmoil in the technology industry will run its course and give investors attractive opportunities. Later this year, investors could even start to see a bit of growth from technology companies once again.

Write to Tae Kim at tae.kim@barrons.com

(END) Dow Jones Newswires

January 06, 2023 11:12 ET (16:12 GMT)

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