The frothiest US technology stocks are still frothy | Saxo Bank

EUR: Range-bound Outlook Amid Tightened Swap Rate Gap

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.

Source: Saxo Group

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
Cloudflare Inc 19.75   21,656 66.38  
Snowflake Inc 19.60   49,820 158.36  
Datadog Inc 18.12   34,293 108.86  
Zscaler Inc 15.46   21,619 153.23  
Crowdstrike Holdings Inc 14.80   36,262 156.29  
Switch Inc 14.69   8,187 33.47 801.3
MongoDB Inc 14.51   19,326 286.03  
Atlassian Corp PLC 14.10 412.76 48,022 188.90  
Visa Inc 14.10 122.26 428,313 199.23 33.3
Mastercard Inc 14.06 191.97 323,696 332.80 36.0
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  
VeriSign Inc 12.54 85.29 18,087 165.11 23.2
NVIDIA Corp 11.86 460.46 443,361 177.06 45.6
Paycom Software Inc 11.77 343.87 17,387 288.56 75.7
Anaplan Inc 11.68   9,655 64.16  
ServiceNow Inc 10.96 367.13 90,738 452.65 380.7
Cadence Design Systems Inc 10.88 333.08 39,279 142.44 50.6
ANSYS Inc 10.56 112.32 22,145 254.57 48.7
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
Adobe Inc 10.04 196.29 191,575 405.45 40.3
Manhattan Associates Inc 9.94 169.48 7,686 121.78 65.8
Paycor HCM Inc 9.32   3,934 22.49  
Fortinet Inc 9.32 619.71 45,196 281.55 73.8
Wolfspeed Inc 9.32 247.13 9,652 78.07  
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
Five9 Inc 8.78 363.53 7,055 101.42  
Paychex Inc 8.74 143.33 43,210 119.69 32.4
HubSpot Inc 8.69 412.41 17,000 355.87  
Microsoft Corp 8.60 309.09 1,952,925 261.12 28.9
Dynatrace Inc 8.46   10,113 35.39 135.7
Autodesk Inc 8.35 106.59 42,868 197.07 82.0
Tyler Technologies Inc 8.30 114.30 14,863 358.36 82.0
Marvell Technology Inc 8.29 287.57 48,974 57.57  
Broadcom Inc 8.24 194.09 240,167 588.24 32.6
Black Knight Inc 8.22 77.34 10,815 69.34 20.4
Synopsys Inc 8.14 270.85 42,254 275.99 51.3
nCino Inc 8.11   3,524 32.00  
Procore Technologies Inc 8.05   6,397 47.19  
Intuit Inc 8.01 205.04 105,138 371.76 47.1
Source: Bloomberg and Saxo Group
 
 
Source: Saxo Bank
EUR: Range-bound Outlook Amid Tightened Swap Rate Gap

Peter Garnry

Garnry developed Saxo Bank’s Alpha Picks which is a monthly publication selecting the most attractive stocks across the US, Europe and Asia. He also contributes to the Saxo Bank Quarterly Outlooks and the annual Outrageous Predictions and is a regular commentator on television, including CNBC and Bloomberg TV.