Are tech stock valuations reasonable? Analyzing sector prospects from a fundamental and historical perspective

- Strong demand for AI applications is driving supply chain and infrastructure needs

- Current valuations are below historical bubble levels, but vigilance is needed regarding market concentration

- Emerging markets in Asia offer competitive AI investment opportunities with valuations lower than in the US

In recent years, stocks related to artificial intelligence (AI) have seen astonishing gains, with investors optimistic about corporate growth and profitability. However, concerns remain over whether valuations have become excessive. To understand this issue, it’s worth analyzing the opportunities and risks from both a fundamental and historical perspective.

Strong demand, solid fundamentals

From a fundamental perspective, AI is no longer just a concept but an actual application with strong demand. Industries such as finance, healthcare, and retail are actively adopting AI to improve efficiency—for example, by using consumer data analysis to create targeted marketing strategies or leveraging algorithms to optimize human resource screening processes. This demand benefits the entire supply chain: from upstream semiconductors and memory, through midstream data centers and servers, to downstream cooling and energy solutions. Notably, AI computing consumes enormous amounts of electricity—searching once on ChatGPT uses about 10 times the electricity of a traditional Google search, further boosting demand for related infrastructure.

This expanding demand continues to drive investment sentiment higher, with investment enthusiasm remaining robust, particularly in data center construction. Although some investors worry that excessive capital expenditure could impact returns, companies currently maintain low leverage ratios, with most funding coming from internal cash flow, resulting in relatively limited pressure. More importantly, AI has moved from the conceptual stage to widespread commercial applications, effectively supporting corporate earnings and cash flow growth.

No signs of a bubble yet, but concentration risk needs attention

Looking back at the dot-com bubble of 2000, many tech companies were still unprofitable, and their concepts were difficult to monetize. At that time, the 24-month price-to-earnings ratio (P/E) of the seven major tech companies was 52x. In contrast, today's 'Magnificent Seven' in the US stock market demonstrate strong profitability, with a P/E ratio of about 27x—far below historical bubble levels. However, these giants account for approximately 35% of the S&P 500’s weight, indicating high market concentration and correspondingly increased risks. After substantial share price gains over the past two years and continuously rising market expectations, any underperformance could lead to significant corrections. Although there are currently no obvious signs of a bubble, over-concentration in indices or individual stocks may lead to excessive risk accumulation, so vigilance remains necessary.

Asian Emerging Markets: More Attractive Valuations

While the US leads in AI, the potential of Asian emerging markets should not be overlooked. China focuses on scalable applications such as e-commerce and cloud computing, while South Korea and Taiwan hold strong positions in memory and semiconductor hardware production. The weighting of AI-related stocks in emerging markets is similar to that of the US, but their valuations are more attractive — with an estimated P/E ratio of 18.6x by 2026, compared to 30x for the US.

Clear Trends, Critical Stock Selection

Whether tech stock valuations are reasonable has no single answer. Fundamentally, strong AI demand and robust profitability support sector growth; historically, there may not yet be a bubble, but concentration risks cannot be ignored. The development trend of AI is irreversible, and technological innovation will only accelerate. Investors should stay close to industry dynamics and conduct in-depth analysis of individual companies' business models and growth potential. Rather than solely relying on index funds or chasing popular stocks, investors can better capture opportunities and manage risks through precise stock selection and diversified allocation.

About BEA Union Investment:

Taifook Investment Management Limited ('Taifook') is a joint venture established in 2007 between Bank of East Asia, Limited, Hong Kong, and Union Asset Management Holding AG, Germany. Taifook provides comprehensive investment solutions for retail, institutional, and pension clients. As a Hong Kong-based asset management company specializing in Asian equities and fixed income, Taifook is committed to delivering high-quality investment solutions and customer service.

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Issuer: BEA Union Investment Management Limited

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