Big Tech is 'richly priced' — but investors will need it to beat the market, Prof Damodaran says
- Aswath Damodaran, professor of finance at NYU Stern School of Business, told CNBC that big tech is "richly priced."
- Often referred to as the "Dean of Valuation," he said it seems difficult to build a portfolio that can beat or even meet the market without one or more technology stocks.
- The professor said investors who don't own any big tech right now might not want to buy at the moment.
Aswath Damodaran, professor of finance at NYU Stern School of Business, told CNBC on Friday that all of the Big Tech stocks are "richly priced," but essential for investors.
"There will be a better time to enter these stocks, but if you're an active investor picking stocks, I don't see how you can have a portfolio without at least one of these stocks, perhaps more, in your portfolio. It seems very difficult to build a portfolio that can beat or even meet the market without these stocks," said Damodaran.
However, the professor, sometimes referred to as the "Dean of Valuation," cautioned new tech investors against jumping into big tech at the moment. For instance, he said it would be "asking for trouble" to enter Apple right now because the stock is currently "priced to perfection." But, investors who already have Apple in their portfolios should pay attention to Damodaran's strategy.
"I'm not selling right now, which I think is an indication of where I think Apple is at the moment," he said. Apple closed Thursday at $454 a share.
Damodaran added that each of the big tech companies is built on a solid foundation. Each company has a "cash machine business," he said — Apple has the iPhone, Amazon has prime, and Google and Facebook profit from online advertising. This, along with the fact that the companies collect massive amounts of data and have "hundreds of millions of users" who are "on their ecosystem for hours," makes the companies especially strong, according to Damodaran.
The professor said the market will reward these companies on the expectation that they will use and "find something to do with these platforms and data." He added, "maybe there's an overreach here, but at least it's based on that expectation."
"If you're interested in holding one of these stocks in your portfolio, put a limit buy 20% below the price and just sit back and wait. The nature of these stocks is that there will be surprises," he said.