Tech stocks, namely Facebook Inc. (FB), Amazon.com Inc. (AMZN), Apple Inc. (AAPL), Netflix Inc. (NFLX ) and Alphabet Inc. (GOOG ), have been flying high all year, pushing valuations to new levels. With price-to-earnings ratios several times higher than long-held averages, investors are getting worried about what could be overheating tech stocks.
But bulls are brushing aside those concerns, arguing that valuations alone don’t provide an accurate picture of the tech companies’ prospects. They prefer to look at financial and strategic progress which, they point out, are more important metrics for creating long-term shareholder value. “I don’t talk about multiples. That’s where the conversation stops,” Jonathan Curtis, a portfolio manager at Franklin Templeton’s Franklin Equity Group, told the Wall Street Journal of conversations about tech company investments. “I tell them, ‘Help me understand what this business looks like at maturity.’” (See more: 6 Reasons Why the Tech Bull Market May End.)
FAANG Valuations Could Get A Second Look
According to the Wall Street Journal, with the FAANG-driven stock market poised this week to set a record for the longest bull run, investors are going to be looking at how to now value tech stocks. Bears argue the high valuations of the group and that fact that the gains are concentrated in a small number of stocks will hurt the broader market but longer-term investors aren’t concerned and believe that by focusing on valuations so much, investors are missing the future value of the current investments. But it’s not just tech stocks that are enjoying high valuations. Pointing to Goldman Sachs data, the Wall Street Journal noted that currently the average stock in the S&P 500 index is in the 97th percentile of historical levels with even consumer staple companies looking overpriced. (See more: Spotify, Altaba Hedge Fund Favorites In Q2.)
Portfolio Managers Still Love Tech Stocks
Despite concerns about valuations, portfolio managers are still smitten with technology and internet stocks. Bank of America Merrill Lynch last month said that the average fund manager has 1.2% of holdings in tech and internet stocks, reported the paper. That’s partly due to the fact that strong earnings growth over the past few years have lowered price-to-earnings ratios even as the stocks climb. Take Amazon as an example. The stock is trading at 85 times earnings and is up more than 60% in 2018. But that is down from an average of about 115 times during the past three years. Meanwhile, Facebook was trading at more than 50 times forward earnings a few years back but profit increases have reduced its valuation to 23 times earnings currently. And that’s with the stock tanking in July.