Is Big Tech About to Crash?

By Lou Basenese, on Tuesday, August 25, 2020

In early 2015 — three years before it happened — I predicted Apple (AAPL) would become the first trillion-dollar market cap company.

Fast-forward to a few days ago… and Apple hit the record books as the first two trillion-dollar company, which I’d also predicted.

Meanwhile, other tech giants like Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOG) have also eclipsed the once unthinkable milestone of a trillion-dollar market cap.

This is prompting many to ask if big tech is getting too big — and if it’s destined for a nasty dot.com-style crash.

But that’s the wrong damn question to be asking!

Let me explain why… and then I’ll reveal how you can make big profits in tech stocks in the coming weeks and months.

Focus on Valuation, Not Market Cap…

Undeniably, tech has become the epicenter of everyday life.

Its role is bigger than ever before, so it makes sense that the size of big tech companies has stretched into the trillions of dollars.

However, just because something is big in absolute dollar terms doesn’t mean it’s overpriced or destined to crash.

In other words, a market cap number alone is irrelevant.

What matters is valuation.

And sure enough, although it seems like big tech is overpriced, the data indicate otherwise.

Consider: All the popular FAANG stocks currently trade for roughly 30 to 35 times historical earnings.

(The lone exception is Amazon. But if it stopped investing so much in future growth and dropped its profits to the bottom line, it too would be trading in this range.)

Now, 30 to 35 times is certainly higher than average. Over the long term, the S&P 500 index has averaged a p/e ratio of around 20.

But it’s nowhere close to the nosebleed levels that portend a crash.

As a frame of reference, keep in mind that p/e ratios for the biggest companies like Microsoft and Cisco during the dot.com era checked-in at 80 to 100.

Add it all up and we’ve got a long way to go before big tech hits those levels again.

In fact, before any meaningful slide in tech stocks occurs, I believe we’ll see Apple hit a market cap of three trillion dollars.

Bottom line: bailing on tech stocks right now would be foolish.

But when should we start looking to get out?

… Then Focus on Growth

Here’s when it’s time to get worried:

When valuation ratios keep rising while growth rates are declining.

When that happens, investors are paying more and more for less and less growth.

Now that’s a losing hand.

But at the moment, that’s not what’s happening…

To the contrary, every quarter, the world’s largest tech companies have been expanding revenues at a healthy 10% to 15% clip.

And if we focus on specific sectors of tech, the growth is even stronger.

Take software-as-a-service (SaaS) companies, for example.

The granddaddy of them all, the $188 billion market cap Salesforce.com (CRM), just reported a 30% increase in quarterly revenue.

The thing is, as I shared on a recent appearance on Fox Business, if we look for under-the-radar mid-cap companies in the same area of the market as Salesforce, we can buy this breakneck growth on the cheap.

For example, companies like Cloudera (CLDR) and Mimecast Limited (MIME) are trading at a 57% and 32% discount to the valuation of CRM, respectively. And yet each company’s subscription revenue base is growing at an equally impressive rate as salesforce.com.

What’s more, fresh opportunities for faster growth keep popping up…

Incoming Hot IPO

For example, just yesterday, California-based Sumo Logic filed plans for a $100 million IPO.

The company is a leading SaaS provider of on-demand cloud log management solutions to top-tier companies including 23andMe, JetBlue, Netflix, PagerDuty, Petco, and ULTA Beauty.

And it’s growing its high-margin, recurring revenues at a 50% clip.

The fundamentals are so compelling, I’m officially adding Sumo to my “Hot IPO Watch List.”

I’m combing through the IPO prospectus now…

And in next week’s column, I’m going to run it through my five-step IPO screening strategy

After I do that, I’ll let you know what price you should be willing to pay for the company’s shares so you can position yourself for maximum profits — and minimum risk.

So stay tuned!

Ahead of the tape,
Lou Basenese
Lou Basenese

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