Investing in Tech Stocks Amid the Market Correction

In a recent annual meet up with Equitymaster's subscribers in early January 2025, I had an interesting conversation with one of our subscribers.

His feedback was that we do not have enough coverage capturing all the trending themes... data centers, coworking, EMS, EVs, and so on.

This concern is understandable. Afterall, a huge runup had happened the stocks riding the new age themes. The inclusion of Zomato in Sensex is an example that one cannot afford to ignore these megatrends.

So why are we so cautious in our approach?

Well, to be clear, we do have a watchlist across these themes. We have often shared watchlists for these themes on our website and YouTube channel.

However, making a recommendation is a different game. As the legendary investor Warren Buffett has said: "A good business is not always a good purchase - although it's a good place to look for one."

Bringing some Indian context to it...

A lot of stocks riding such themes had been trading at prohibitive valuations.

A PE of above 50, and even beyond 70, has become the norm.

The total addressable market is an easy term to throw around.

With some good language and narrative, a lot of such businesses had found investors lapping them up, who seem to have developed a strange tolerance for losses, cash burn, poor profitability and lack of visibility on path to profits.

These mistakes and ignorance were masked in the era of cheap liquidity.

However, as the sentiments turn cautious, we will get to see who has been swimming naked.

In fact, the realisation is now dawning.

Back home, Ola Electric has fallen over 60%. Another stock, Gensol Engineering, once a much hyped tech business on solar and EV theme, has crashed. High pledging, delays in debt servicing amid high debt, and recent insider selling have made the markets nervous.

Globally, the stock of Tesla has collapsed 50% since its peak in December. A leader in the global tech pack, and a business that has redefined the concept of cars and driving, is down 50% in less than a quarter.

It was Musk's perceived competence at charisma that took the stock a long way. Musk's conduct and actions, along with his involvement in politics, has come at a huge cost. The management has literally been a make or break factor here.

As more such corrections unfold, some very old lessons in investing will be learnt by new age investors.

Investments in new age companies and themes deserve a healthy dose of caution.

Disruptors are not disruption free themselves and in fact are skating on thin ice.

In the real world where there will always be known and unknown risks, the sanctity in balance sheet, management quality, business model and margin of safety are some concepts that will always remain relevant for long term investors, in both conventional and new age businesses.

We are not deep value investors hoping for tech stocks to trade near book values. Nor we are playing the pricing game - entering at high prices hoping a bigger fool to give us the exit.

For us to place the bets, the business - new age or otherwise, must clear a few basic conditions: The business model should make sense and it should be backed by competent and ethical promoter.

Past winners and hindsight do not help much in a world with deep tech shifts. The conviction on a great business comes from visibility and tenacity amid dynamic regulatory and industry shifts.

We must be reasonably convinced that the disruptor we are betting on is ahead of the curve and does not end up being a victim to the next challenger. In other words, it should have the ability to adapt and sustain.

Lastly, whatever the story, there should be margin of safety in valuations. And if you can't figure this out, you are operating beyond your circle of competence. You might as well be gambling.

But that's my view and I'm no tech expert. So, let's hear from someone from the tech industry itself. In a recent interview (cited in Economic Times), Narayana Murthy of Infosys, said:

• I don't understand high price-to-earnings (P/E) businesses. I am used to P/E ratios between 7 and 15, maybe 20-25 in exceptional cases. But when people talk about a P/E of 100, it's speculative for me.

What do you think?

Let me know your views.

Warm regards,


Richa Agarwal
Editor and Research Analyst, Hidden Treasure
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)