Most people agree that US equities are expensive right now, with even bulls conceding that they are on the high side of fair, and the tech sector is more expensive yet. Whether we’ve reached a tech bubble is partially a matter of definition (some people argue that you can’t have a true bubble without private debt fueling asset prices), but research from Mark Berry at FactSet shows that it’s really just part of the tech sector that is getting out of hand.
Tech bubble: P/S deviation more than triple other sectors
“Companies like King Digital Entertainment PLC (NYSE:KING), WhatsApp, LinkedIn Corp (NYSE:LNKD), and even Twitter Inc (NYSE:TWTR) have achieved valuations that, under any typical fundamental-based analysis, defy all logic,” Berry writes. “Twitter, for example, has a Price/Sales ratio currently over 30x, while Facebook Inc (NASDAQ:FB) carries 15.9x. By comparison, Apple Inc., (NASDAQ:AAPL)’s P/S is 3.3x. LinkedIn’s P/E ratio is 680x; Google’s is 31x.”
The median price/sales of tech companies with revenues above $500 million is 2.4x, which is high but not necessarily problematic. But the standard deviation is huge: 5.1 compared to 1.5 for consumer services, 1.4 for transportation, and 1.5 for communications. In other words, it’s actually a handful of stocks that are drawing comparisons to the dotcom bubble for the whole sector.
NASDAQ Composite’s reasonable PE reflects tech megacaps
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