Investors have focused on tech stocks over the past year as the stocks have been volatile. However, Morningstar’s top strategists undervalue the sector and distance themselves from several big tech companies. “The technology sector itself is really perfectly priced,” said David Sekera, the firm’s U.S. market strategist. The tech stock currently trades at a 6% premium to fair value and is now “entering territory where we believe it is collectively overvalued by sector-wide standards,” Sekera said in September. He spoke on CNBC’s “Street Signs Asia” on the 27th. The current position in tech is a reversal from the optimism we had earlier this year, especially in small- and mid-cap stocks. And that’s despite a recent strong rally in U.S. stocks, driven by strong performance from major tech companies and strong economic data that generally boosted sentiment. Overvalued plays For now, Sekera is avoiding headline-grabbing companies whose valuations are “increasing too quickly,” such as iPhone maker Apple and database software makers Oracle and IBM, he said. said. Morningstar gives Apple a two-star rating. The financial services company rates stocks from 1 to 5 stars, with a 5-star rating indicating that the stock is undervalued. “I don’t think we were necessarily all that impressed with their AI deployment,” Sekera explained. “Sales in China have been relatively weak and iPhone 16 purchases have probably slowed down as well. So I think this is a good time to lock in profits,” he added. For Oracle, Sekera believes the market is “overestimating the long-term growth of its cloud business.” The stock has a one-star rating from Morningstar. The company’s cautious stance on the stock stands in stark contrast to the optimism of other veteran industry watchers. Oracle recently raised its fiscal 2026 revenue forecast to at least $66 billion, higher than LSEG analysts’ expectations of $64.5 billion. Morningstar’s concern is that “over time, it will lose market share to other types of databases,” Sekera explained. Oracle is also a company that was “really attracted to the AI story, but even more than that, it exceeded my expectations,” he added. Regarding IBM, Sekera said, “For the past 10 years, much of the company’s business has been melting ice.” Morningstar gives the stock a 1-star rating. Sekera’s pessimism comes even though IBM’s second-quarter profit beat Wall Street expectations. The hardware, software and consulting services company expects free cash flow to exceed $12 billion in 2024. “Yes, we will benefit from artificial intelligence to some extent, but I don’t think there is enough AI here to cover many of the other businesses,” Sekera explained. ‘Hitting on all cylinders’ There’s one Big Tech stock that Sekera still likes. It’s Microsoft. “I would be looking at moving from other overvalued companies like Apple, Oracle and IBM to companies like Microsoft, which is still doing very well,” he said. “Microsoft is really firing on all cylinders…[cloud business]is accelerating into the second half of the year.” Morningstar gives the stock a four-star rating. Elsewhere in the market, Sekera is keeping a close eye on “undervalued” American Depositary Receipts (ADRs). These include Chinese technology giants such as Baidu, Pinduoduo, JD.com, Tencent, and Yum China. Morningstar has a 5-star rating on Baidu and Yum China, and a 4-star rating on PDD and JD.com. —CNBC’s Jordan Novet contributed to this report.
