What’s the most interesting thing about investing in tech stocks this year? You guessed it-value. After many years of insane stock valuations, stocks are being bid way down this year by almost every valuation measure. Tuesday’s market slump, which saw the tech-heavy Nasdaq plummet 5.2%, added pressure.
The new focus on value means you should value client portfolios if you haven’t already. This includes looking for stocks across a broad spectrum rather than being stuck in the traditional large-cap or small-cap, growth or value categories.
Even some expensive stocks may not be as expensive as you think when you take a closer look at their financials. Weighting a portfolio of technology stocks by valuation is one way to catch these interesting exceptions.
(Ticker: SNOW), the database software provider that went public in late 2020, has one of the highest revenue growth rates of any cloud computing software company, or any tech company for that matter, forecast 54% in the next four quarters.
at the first blush,
is among the most expensive software stocks, trading at 22.3 times its forward 12-month sales, using enterprise value as a numerator. EV, as it’s called, is a good measure for tech companies because it accounts for cash and debt rather than just market cap.
While that’s certainly expensive, Snowflake is cheaper than many other high-growth names on two other metrics: relative growth and relative profitability. Dividing that EV to sales multiple of 22.3 by Snowflake’s projected sales growth of 54% gives you an EV to sales to growth ratio of 0.41.
That’s right, Snowflake is trading for a fraction of its very high growth rate. That’s less than a variety of high-growth software names such as
(TTD), which show an EV to sales to growth ratio of 0.47 to 0.66. They’re all pretty expensive, but none of them have Snowflake’s growth.
Viewed in this multidimensional way, Snowflake offers an example of a stock that has better prospects than others, but still has value in its favor. Think of it as a multiple filter system for stocks, much like twice-pressed olive oil or a three-stage water filter creates a more refined product.
With that in mind, Barron’s Advisor has filtered over 500 US-listed technology stocks to determine their relative merits. The first filter was sales growth. While there has been a greater emphasis on value this year, growth is still a priority for tech investors.
The projected average sales growth for the next 12 months for the entire group is 11.4%. All companies with projected growth rates below this average were discarded as undergrowing companies. All stocks from companies that are not yet profitable were also removed, leaving a group of 99 stocks.
This group was then compared on four metrics: growth, EV to sales, EV to growth to sales, and price-to-earnings relative to their earnings growth rate, or PEG. A stock had to be better than average on at least two of those four measures. This resulted in a filtered list of 28 stocks.
The resulting portfolio has a couple of interesting qualities: It’s both higher growth and cheaper than the original universe of 500+ stocks and has also performed better this year.
|company||ticker||Current price||Year-to-date % change||EV (million US dollars)||EV/estimated sales||Estimated Rev Growth Rate (Forward 4Q)||EV/Sales/Est Rev growth rate||P/E (Next 12 Month Earnings)||P/E/Long Term Growth Rate||div. yield|
|Take Two Interactive Software||TTWO||$127.78||-28.10%||$19,282.67||3.02||72.39%||0.04||20.97||1.37||0.00%|
|Monolithic Energy Systems||MPWR||$447.20||-9.35%||$20,786.66||10.53||31.66%||0.33||32.54||1.19||0.67%|
|modern micro devices||AMD||$85.45||-40.62%||$136,661.40||4.88||29.68%||0.16||18.25||0.49||0.00%|
|Palo Alto Networks||PANW||$564.77||1.44%||$56,004.25||8.14||25.00%||0.33||58.34||2.1||0.00%|
|Arista Networks||A NET||$124.41||-13.45%||$36,535.73||8.36||24.83%||0.34||28.37||1.57||0.00%|
Data as of September 9th.
The average EV-to-sales ratio for the group of 28 is more expensive at 8 versus 5. But the group outperforms the broader stock universe on the other three metrics: growth rate, EV to sales to growth, and P/E to growth.
The average estimated growth rate over the next four quarters is 37.5% for the 28, more than triple the 11.4% rate for the entire universe. The EV to sales to growth ratio of 0.23 is half the broader universe multiple of 0.43. And the PEG is almost two-thirds cheaper at 2.4 versus 6.6 for the broader universe.
Additionally, the group of 28 stocks in 2022 was down 18% by the close on Friday, a far better performance than the average 25% drop for the broader universe.
To test for value, Barron’s Advisor also compared the metrics and performance of the 29 stocks to a group of 65 stocks that were the most expensive of the 99 high-growth names, as measured by EV to sales to growth. The 28 rating-weighted names once again significantly outperformed the expensive names, which fell the same 25% this year as the broader universe.
what does that tell you Growth is rewarded, but growth with some measure of valuation support holds up better than paying for growth at all costs. That’s likely to remain the case for a while given the risk-averse climate in tech investing.
The best thing about valuation weighting is that each group of high-valued stocks like the 28 listed here can be adjusted to emphasize additional aspects. For example, if your clients value dividends, you can shift your focus to higher-yielding stocks to achieve a balance of income, growth, and valuation.
Think of rating weighting as adjusting the knobs on a stereo to select the type of audio mix your customers prefer.
Now, more than ever, is the time to tell clients to be stock pickers, but stock pickers with a holistic perspective and not just a bet on a single stock or recipe.
Tiernan Ray is a New York-based tech writer and editor of The Technology Briefa free daily newsletter featuring interviews with CEOs and CFOs of tech companies, as well as news and analysis on tech stocks.
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