The frothiest US technology stocks are still frothy
Head of Equity Strategy
Summary: This year has been brutal for growth and technology stocks in the US, and many investors are asking themselves whether the recent declines are a buying opportunity. The short answer is no. Financial conditions are still tightening and we are in a regime that is typically associated with negative equity returns. The most frothiest parts of the US equity market are also still valued at equity valuations above their pre-pandemic levels suggesting more downside risks.
Pre-pandemic valuation levels have not been reached yet
With Nasdaq 100 futures down 27% from its late 2021 peak many clients are asking whether it is time to aggressively get into the equity market and especially US technology stocks. Our view on US equities has not changed and thus we remain defensive favouring themes such as commodities, defence, logistics, India, cyber security, semiconductors, and high quality companies. Financial conditions are still tightening and we have entered a level of financial conditions that is typically associated with negative equity returns. India’s export ban on wheat over the weekend due to a failed harvest will continue add inflationary pressures impacting interest rates and equity valuations.
It is interesting to note that the 4% most expensive part of the US equity market, which are companies with the 12-month forward EV/Sales ratio above 8x, is still more expensive than its pre-pandemic equity valuation level despite the recent significant declines in US technology stocks. Even if this group of very expensive stocks get back to their pre-pandemic level, which would require another 15% drop, that level would again be twice the equity valuation level from the period late 2013 to late 2016. In other words, if the frothiest part of the US equity market has to come back to those levels the declines in front us will be quite substantial. We recommend investors to begin planning for which technology stocks to buy based on business model analyses and wait for equity valuations to come down further. In our view, there is no time to rush. It is better to get it right than getting there fast.
The table below shows the companies in the Russell 1000 Index with a 12-month forward EV/Sales above 8. There are 43 companies that match this criteria after we have removed Liberty Broadband due to erroneous analyst data which corresponds to 4.2% of the total universe size in the index. The median 5-year total return for this group is 271% and the median trailing P/E ratio is 51x which is significantly above the S&P 500 P/E ratio of 20x.
|Name||F12M EV/Sales||5Y total return (%)||Market cap (USD mn.)||Last price||P/E|
|Crowdstrike Holdings Inc||14.80||36,262||156.29|
|Atlassian Corp PLC||14.10||412.76||48,022||188.90|
|Trade Desk Inc/The||13.95||900.39||25,250||51.92||247.2|
|Aspen Technology Inc||13.90||183.96||11,040||165.75||37.9|
|Bill.com Holdings Inc||13.48||12,360||118.54|
|Paycom Software Inc||11.77||343.87||17,387||288.56||75.7|
|Cadence Design Systems Inc||10.88||333.08||39,279||142.44||50.6|
|Monolithic Power Systems Inc||10.44||374.83||20,134||431.67||73.7|
|Bentley Systems Inc||10.26||10,192||32.09||84.6|
|Manhattan Associates Inc||9.94||169.48||7,686||121.78||65.8|
|Paycor HCM Inc||9.32||3,934||22.49|
|Enphase Energy Inc||9.25||19014.47||21,306||157.79||134.2|
|Paylocity Holding Corp||9.25||280.78||9,370||169.98||108.0|
|Tyler Technologies Inc||8.30||114.30||14,863||358.36||82.0|
|Marvell Technology Inc||8.29||287.57||48,974||57.57|
|Black Knight Inc||8.22||77.34||10,815||69.34||20.4|
|Procore Technologies Inc||8.05||6,397||47.19|
Quarterly Outlook Q2 2022
Quarterly Outlook Q2 2022: The End Game has arrived
- Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
Productivity and innovation have never been more importantAs the world economy hits physical limits and central banks tighten their belts, could equities be facing a 10-15% downside?
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)