When it comes to valuing the Tech sector and “Big Tech”, there are 2 distinct approaches, according to a November 9 blog post from DataTrek.
The first is traditional: sustainable earnings growth creates higher-than-market multiples.
The Tech sector is expected to earn 70% more in 2022 than 2019, almost double the improvement in S&P 500 earnings power over the same period (+39 pct).
Google and Facebook are also expected to show roughly a double in earnings power by 2022. Those are strong enough results, in our opinion, says DataTrek, to justify 24x – 27x multiples when the market is trading for 21x.
Then there is Amazon and Tesla, with their 68x – 147x multiples on out-year earnings. As DataTrek recently wrote, these are not stocks so much as they are long dated call options on tech-based disruptive innovation.
Both companies have theoretically huge addressable markets and strong competitive advantages.
Their price-earnings valuations may look ridiculous, but they don’t trade on investor confidence in 2022 earnings.
Rather, their valuations rise and fall with incremental success or failure in disrupting the global auto industry or ecommerce and cloud computing.
Large Cap Tech has been an important piece of the move in the S&P 500 over the last month, rallying 10.5% to the index’s 7.1% gain.
DataTrek’s takeaway: large cap Tech sector valuations are pretty much where you’d expect them to be if you exclude the “option stocks” (Tesla and Amazon). The group is not, dramatically overvalued. The one exception may be Tesla, DataTrek said.
Tesla Inc shares posted their worst daily fall in 14 months on Tuesday. Nearly $200 billion in market capitalisation was wiped from Tesla as Musk's potential sales of his $17 billion stake triggered concerns about the stock's valuation.
Musk asked his Twitter followers over the weekend if he should sell 10% of his stake in the company as Washington proposes to hike taxes for the super-wealthy. Nearly 58% said they would support such a sale.