Big tech stocks are still very expensive, despite the downturns this year. This is the key
Now, giants –
(Stock ticker: AAPL) and
(GOOGL) Two examples – they didn’t go untouched. They got into the sell-off just like the rest of the S&P 500, which is down nearly 16% from its all-time high in early January.
The market has not been able to shake off two big concerns – the Russia-Ukrainian war and the recession caused by the Federal Reserve, which is desperate to lower inflation as interest rates rise.
However, in comparison, Big Tech is quite expensive. These names are simply richer than those tried in other industries—
(F), for example, or
The primary metric is the earnings multiplier. Apple and Alphabet—along with
(NVDA) – Trade with average forward earnings multiple of about 38 times. That’s just under the 17 times total multiple of the S&P 500.
Big Tech has managed to pull a rabbit out of the hat because of its bright future: relatively fast earnings growth.
Amazon’s dominance in e-commerce, for example, allows it to continue to take market share from retailers — and even other online sellers. Tesla continues to be a leader in electric vehicles, which are replacing gas-powered vehicles. Nvidia enters a new brand metaverse business, adding new opportunities.
Analysts predict that these three — the fastest growing of the Big Seven — will see earnings per share doubling at least 20% annually over the next three years, according to FactSet.
Bottom line: These equity multipliers will remain high. This is key for the S&P 500 because high multipliers for big tech keep the index’s total multiplier – and thus its price level – high.
The index is weighted by market capitalization, which means that companies with a higher market capitalization have a greater influence on the level of the index. The combined market capitalization of the seven tech names is nearly $8.8 trillion – just over a quarter of the index’s total market capitalization.
What investors should realize – or remember – is that if Big Tech multiples fall quickly, stock prices will cause prices to fall, and lower prices will cause the S&P 500 to fall.
Now, Big Tech’s multiples will quickly decline if its business growth prospects slow quickly.
(NFLX) knows. The streaming platform has essentially pulled out of the Big Tech group, with a market capitalization of just $100 billion. growth for Steaming entertainment slow down Netflix’s forward earnings multiple has fallen below 17 times for a moment this year, down more than 20 times.
Meta platforms are also known. Tech giant revealed Advertising growth slows in its latest earnings report. Today, the shares are trading at about 15 times earnings, down – again – more than 20 times.
“It takes a massive blast like Meta/Facebook… to hack ratings,” wrote Jessica Rabe, co-founder of DataTrek.
The healthiest tip is to focus on the long term. As a company’s growth slows, its multiplier should decrease gradually — not all at once. Here’s what’s actually happening: Microsoft’s current multiple of 24.7 has fallen 34 times from the pandemic-era peak.
An orderly drop in Big Tech multiples could allow the rest of the market to gain over the years as companies across the board, Big Tech included, are still increasing their dividend streams.
Write to Jacob Sonenshine at firstname.lastname@example.org