The frothiest US technology stocks are still frothy

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