No bubble for the Bigh Tech

No bubble for the Bigh Tech

Adjusting the profits for intangible assets, taking into account the costs of research and development, the valuations and the multiples of the Stock Exchange appear to be far from being"tight".

 

Profit growth, absence of debt and valuation that, considering the adjusted earnings for intangible assets, appears to be far from being “tight”.

These are the main features of modern technology companies, which are one of the most defensive titles in the market, especially in a general, steady world.

"We are talking about a sector that is no longer the one of the 2000’s and which is therefore far from a potential bubble effect," explains Stefano Reali, portfolio manager of Pharus.

The real critical point are valuations, which apparently might seem excessive. Especially if you look at the main market multiples, such as P/E or PEG (ratio between P/E and Expected Profit Growth rate). Amazon, for example, has a price/earnings ratio of 113, while Facebook, Apple and Alphabet (which controls Google) have a P/E of about 33. Netflix, on the other hand, to close the picture of the so-called Faang, has a P/E of about 79.

The valuations are excessive, however, once the perspective is changed, the picture improves significantly. Let’s start with a comparison between profits and market capitalization. "If in 2001 the dot-com generated just 90 billion in profits against a total capitalization of 6.5 trillion dollars, today the profits of modern technology companies are almost quintupled and have reached 420 billion, against a market capitalization that has only doubled to 13 trillion - argues Reali – In addition to this, the average growth trend in the technology sector is twice bigger compared to the market in general (15% against 7%)".

Another significant indicator is the profit margin (the ratio of net income to revenues), which for tech securities is on average around 20% compared to the 12% of the market. Finally, reaching to the multiples of the Stock Exchange, adjusting the profits for the intangible assets, like the costs of research and development (that determine the competitive advantage in terms of innovation), "Big American technology valuations appear to be far from being “tight” - concludes Reali - And companies like Google see the P/E fall from 32 to 23, with a discount of 30% compared to current stock market quotes".

Covid-19 made it clear that the future of markets is in technology.


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