Is the Technology Stocks' Recovery for Real?

In the drop-down menu of sector quotes on Equitymaster, we have India's Big Tech Stocks.

The irony is, none of these stocks are the biggest technology firms in terms of marketcap or revenue.

The reason we call them big is because they have the potential to get much bigger over the years. So much that a few could even replace the current IT behemoths on the indices at some point.

Why am I bringing your attention to these stock quotes?

Well, because the stocks of technology companies have seen wild swings over past two years. Not just in India, but globally.

The stocks on our Technology watchlist have, on average, seen at least 30 to 50% fall and rise during this time frame.

But globally the story is much bigger.

Back in 2021, it was easy to claim that there was a bubble in tech stocks. Unprofitable companies were worth tens of billions. IPO stocks doubled on their debut.

No one batted an eyelid when companies like Paytm, Zomato and Policy Bazaar came to the markets with no profits. The more speculative the investment, the higher the price would go.

Pockets of speculative stocks grabbed headlines.

Remember the stock of US broking entity Robinhood? Such stock stories kept investors distracted.

Meanwhile, rapid change was unfolding in earnings growth of global tech behemoths like Apple, Alphabet, and Meta.

Apple, Alphabet and Meta saw earnings doubling between 2019 and 2022. Amazon's earnings nearly tripled during this period.

Also, after a substantial rebound in valuations the stocks are back to their highs. In 2023 itself, the Nasdaq 100 is up over 30% year-to-date.

All this on the back of a technology that has captured the imagination of technology geeks and users alike. It goes by the name of Artificial Intelligence or AI.

The stock price of US tech company Nvidia soared by 25% after the management predicted a massive boom in demand for its computer chips in the latest earnings call.

The company expects to meet the needs of AI products such as ChatGPT.

The share price of Nvidia has already more than doubled over the course of 2023 amid huge optimism over the rapid progress of generative AI products. These require massive datacentres full of semiconductor chips to operate.

So, its AI business-led valuation pushed Nvidia past the trillion-dollar marketcap benchmark. This allows Nvidia into the club of few trillion dollar companies such as Apple and Microsoft. Meta was a former member.

Naturally, companies are racing to show how they will incorporate AI into their existing businesses.

Some tech experts also warn about the risk of AI to human lives. But that does not stop companies from riding the massive tailwinds that AI has to offer.

Many semiconductor chip companies outside the US are caught up in the geopolitics of the US and China amid tit-for-tat restrictions on chip exports.

Indian technology companies are seeking to take advantage of the situation to become a global hub for both, chip making and AI-led products.

As per NASSCOM, AI is expected to raise India's annual growth rate by 1.3% by 2035.

But most of the homegrown technology companies in India are not AI native. In other words, adopting AI can make them dependent on foreign technology partners.

Meanwhile, investors looking to buy fancy AI stocks in India may have to shell out a fortune in terms of valuations.

The valuations of AI stocks remind one of the dotcom boom.

So, while the resurgence of technology stocks may not be short lived, that bullishness about the potential of AI could be.

It is important that as a long term investor, you diversify your risks.

Unlike AI, applications and tools for quantum technology could be homegrown for Indian tech majors.

Of course, it may be a while before quantum technology finds wide scale commercial adoption like AI.

But with an early mover advantage, Indian tech majors can have a huge upside once the research on quantum technology begins to accelerate their product launches.

For investors, companies like Infosys and TCS offer the opportunity to ride the massive technology tailwind at relatively reasonable valuations.

So, don't be enamored by the global technology recovery. Rather stick to homegrown stories of Indian companies making headway with technology tailwinds of the future.

Warm regards,


Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)