A couple of high-profile takeovers of videogame companies has stirred optimism that acquisitions will help technology stocks recover from the battering under way in the market now. That sentiment may be premature.

Sure, behemoths Apple, Microsoft, Amazon.com and Alphabet are sitting on more than US$100-billion in cash and equivalents and buyers also have access to cheap financing if needed. But the Nasdaq 100 Index’s 8.2% slump from its November record doesn’t mean high-flying tech shares are suddenly inexpensive across the board.

Microsoft’s deal for videogame maker Activision Blizzard and Take-Two Interactive Software’s agreement to buy Zynga were both driven by specific strategic goals of the acquirers. Buyers are less likely to step up for unprofitable companies or those with slowing growth, especially in software, where valuations are off the charts, said Brian Barish of Cambiar Investors.

“There is a lot of valuation deflation that can still happen in the space,” said Barish, chief investment officer at the value-focused firm. Bond yields are likely to climb further, and “we do think higher interest rates will press on valuations”.

The Nasdaq 100, more than half of which is tech stocks, has slumped because of the surge in treasury yields, driven by the Federal Reserve’s plan to raise interest rates to tame inflation. Yet many big-name companies in the benchmark index are still expensive. Adobe, for instance, has fallen 25% from its November peak, but is still priced at 13 times estimated sales versus 2.8 times for the S&P 500.

“It’s a great company but that valuation is absolutely extraordinary,” Barish said in an interview.

Laggards

Among the Nasdaq stocks down about a third or more over the past two months are software makers Datadog, Atlassian and Zoom Video Communications. Cybersecurity companies Crowdstrike Holdings and Zscaler are down similarly over the same period.

Optimists say buyers will sift through the ranks of tech stocks and may indeed snap up those that still have healthy growth or a market niche.

“We’re going to see more M&A activity as companies look at their whole game plans and see prices coming down quite a bit,” said Tom Plumb, manager of the Plumb Balanced Fund, which held Microsoft, Apple, Amazon and Alphabet as of 31 December. “A lot of stocks are down at least 50% off their highs, which is the sort of correction we saw in the dot-com era.” — Jeran Wittenstein and Ryan Vlastelica, (c) 2022 Bloomberg LP