The recent IPO of Dropbox (NASDAQ:DBX), the subsequent rise of 35.6% in its price, and the fact that Dropbox is yet to turn a profit brings me memories of late 1999. During the dot-com bubble, valuations went berserk: Companies without any profits, or any prospects of profits were trading at outrageous multiples, while profitable companies were also valued at P/Es of several hundreds. Fast forward 18 years and you may find that times have changed and investors learned their lessons… or did they?Unlike the early 2000s, these days we can see a wide array of companies valued at both ends of the multiples spectrum:
Take for instance Tesla Inc. (NASDAQ:TSLA) even though as of last Friday it had dropped 20.6% from its highs, it is still trading at an infinite multiple to earnings (it has negative earnings). See my post The Emperor’s New Clothes for the full story. Other stocks such as social media powerhouses Twitter (NASDAQ:TWTR) and Snap Inc. (NASDAQ:SNAP) still have to turn a profit.
Others, such as Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) are trading at a P/Es of 240 at 243 respectively. On these, the market is offering a very incongruent view: they are the two most highly valued FANG stocks from an earnings point of view, yet their business models are completely different: Netflix is a one horse race, and I fear the market is putting too high expectations this company’s future market penetration, customer loyalty, and ability to hike prices.
Amazon on the other hand is a behemoth, it is practically a monopoly in many categories, and has a well diversified portfolio. Most importantly, it is constantly reinvesting its profits. So the market is putting (almost) the same multiple to two completely different business models, with two different futures: one very clear, and one more… let’s say opaque.
Then at the bottom end of the valuations scale we find: Apple Inc. (NASDAQ:AAPL) at 12 times forward earnings, Facebook (NASDAQ:FB) at 17.9, and Alphabet Inc. (NASDAQ:GOOG) at 21. On the face of it, they look like value plays compared to their high flying peers.
Should you put your money in Facebook? probably not yet. It has broken its long term support at 161.8, and the next technical stop is around the 145 level. Although there is value at this level, the company is being hammered in the court of public opinion, and we need to let the dust settle before picking up the pieces.
There are some very nice value plays in technology, not least of them Intel (NASDAQ:INTC) and Cisco Systems (NASDAQ:CSCO), both trading at 13 and 14 times forward earning; however, if you want to put your money in the 200+ P/E stocks, you might have a bigger pop, but remember: At the end of the day, earnings rule and if expectations can’t be met, the price will adjust violently.