analysis | Profit math, catching up with tech giants


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Who could have predicted that the stock price of the tech giant would crash? Who bothers doing a little math.

Technology stocks are taking a historical hit. The average tech stock in the Russell 3000 Index is down 44% from its 52-week high, with many stocks down even more. About a quarter of about 400 stocks in the sector are down more than 60%, most of them small companies. But big tech didn’t get much better. Amazon.com Inc. is down 43% from its 52-week high. Netflix Inc. is down 73%.

The collapse of hype tech startups is not surprising, but certainly investors could not have expected the tech powerhouse to be treated similarly.

Or can it be done? When Amazon stock began to plummet in July, Amazon stock was trading for more than 40 times Amazon’s projected earnings for the current fiscal year. This is a high figure even for a growth stock. The forward price-to-earnings ratio for the Russell 1000 growth index has averaged around 20 since 1995, the longest period for which numbers are available. (The Russell 3000 growth index averages about the same, but the data set goes back to 2006.)

Amazon investors are more likely to be content to pay more than double the historical average for growth stocks, or to look forward to future growth to justify the company’s overvaluation. One way to measure these expectations is to calculate the return implied by the stock at the long-term average of 20x growth stocks. In that sense, investors’ expectations were ridiculous. To justify its 52-week high in July with 20x forward earnings, Amazon would need to deliver a profit of $187 per share. That’s far from the $17 stock analysts expect Amazon to achieve this year.

How long? Analysts also expect Amazon’s revenue to grow 12% this year, more than double the historical average revenue growth for the Russell 3000 growth index. Even based on faster pace and Amazon’s historical average profit margin of around 3%, it would take more than 20 years for the company to achieve earnings-per-share of $187. It could be optimistic as a big company like Amazon is not easy to maintain at the level of revenue growth.

Since 1995, it has taken an average of four years for earnings to catch up with expectations included in the Russell 3000 Growth Index, and in many cases less. Investors are no longer hesitant and can quickly change their minds in extreme cases. In 1999, at the height of the dot-com craze, a multiple of 20 on the growth index meant earnings of $33 per share, nearly three times the index’s earnings in the previous fiscal year. To keep up with expectations within four years, profits would have had to grow by more than 27% per year. This is nearly four times the index’s average annual return growth of 7%.

Investors ran for the exit, realizing that their growth expectations were unattainable. The Russell 3000 growth index has plunged more than 60% from highs to lows over the next two years, lowering valuations and earnings expectations. After the 2002 Growth Index sold, buyers waited two years for earnings to catch up with expectations, whereas those who bought in 1999 and stopped waiting 16 years.

Amazon investors are more patient, waiting on average seven years for their earnings expectations to materialize, but they too have their limits. People who paid big bucks for Amazon stock in 1998 had to wait 20 years to catch up, but not many, as the stock fell 98% between 1999 and 2001. As with the broader growth index, investors who bought more reasonably priced stocks in 2002 waited only two years for their earnings expectations to come true.

Amazon investors are still expecting too much after the stock has plummeted. Amazon’s stock is currently trading at 54 times this year’s earnings. Even if earnings rebound next year, as analysts expect, the stock could trade nearly 30 times, which is not cheap.

The same analysis applies to Netflix, but Netflix is ​​trading at 17x its earnings this year, up from over 50x a few months ago. Netflix will have little trouble delivering the growth investors expect from its current valuation. The same goes for Google parent Alphabet Inc. and Facebook parent Meta Platforms Inc., which are trading at 18x ​​and 14x this year’s revenue. Apple Inc. is not far from 22 times.

But Amazon isn’t the only supporter. Of the giants, Tesla Inc. is still trading at 55x this year’s revenues and Salesforce Inc. at 34x. Don’t be surprised when investors decide that the rest of the high-flyers won’t live up to their high expectations anytime soon.

This column does not necessarily reflect the views of the editorial board or Bloomberg LP or its owners.

Nir Kaissar is a Bloomberg Opinion columnist covering markets. He is the founder of Unison Advisors, a wealth management firm.

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