At the end of May, we highlighted that after an unprecedented buying spree, which has sent the Nasdaq to nosebleed record levels, a crack had appeared in the second tech bubble: after weeks of relentless inflows into the sector, tech had suffered its largest outflow in over a year.
Was this the sell signal many had been looking for, sellside analysts wondered: Miller Tabak's Matt Maley said in a note to clients that"everybody remembers 2000, so they might be getting a little nervous with this development. I just wonder how many people have said to themselves, ‘If AMZN gets to $1,000, I’m going to take at least some profits."
One week later the answer is: virtualy nobody.
Which is a problem, because while nobody wants to be the first to sell this momentum juggernaut sector, where a handful of tech stocks are now responsible for more than half the S&P YTD returns, the warnings are getting louder and louder.
As Bank of America observes, in May, tech - the month's best-performing sector - saw its P/E expand most. At 19x, it trades at its highest levels post-crisis, but more concerning is that tech is now the most overweight it has ever been, including the tech bubble, by large cap active funds in the history of our data - particularly the FANG stocks.
Ok, so everyone is "all in", but is it overvalued? The answer depends on what valuation multiple one looks at. Although Tech's 8% premium to the S&P 500 P/E is the biggest premium since 2010, perhaps surprisingly it remains low relative to history, even excluding the Tech Bubble. Within Tech, all industries are trading either below or in-line with historical average relative P/E multiples, and notably, valuations within Communications Equipment, Internet Software, Semis, and Tech Hardware suggest 15-50% implied upside if multiples were to mean-revert.
There is a big "but" - P/E multiples are based on adjusted, non-GAAP earnings, which in addition to many other items, also exclude stock-based compensation.
Which is why in addition to P/E, BofA also looked at tech on an EV/Sales basis, where it finds that "tech looks stretched." This is what it found:
Based on EV/Sales, which would not be impacted by accounting differences such as the inconsistent treatment of stock-based compensation - a large expense for many Tech companies that we estimate could understate Tech's current P/E by as much as 10%, Tech trades at its highest relative multiple since the Tech Bubble, and is trading well above average even when excluding the Tech Bubble (Chart 1).
And while EV/Sales may be the highest since 2000, and 50% above average, momentum chasers active managers will respond that it is not at the all time highs just yet: with the ratio at 1.8x currently, it still has over 40% before catching up to the bubble highs of 2.6x...
...which would mean AMZN can easily hit $1,400 before it rolls over, a price which would mean Jeff Bezos' net worth would be roughly $120 billion.