It might be time to start worrying about tech-stock valuations. A standard issue analyst note set off my alarm: On Wednesday, Goldman Sachs upgraded Palantir Technologies from Hold to Buy, while more than doubling its price target on the stock to $34.
It’s not that I’m concerned about Palantir’s business; I see real value in the company’s big-data analytics platform. But Goldman’s report captured the market’s current philosophy around valuation, which is basically to ignore it.
The investment bank argues that
Palantir
(ticker: PLTR) deserves to trade in line with other fast-growing companies. And Goldman points out that companies growing revenue at better than 30% a year currently trade at 44 times estimated 2021 sales. That multiple gets you to a $34 price on Palantir shares. Keep in mind that last September the stock opened for trading at just $10 after its direct listing on the New York Stock Exchange.
Reading Goldman’s note, I broke into a cold sweat. The valuation strategy fails to address an obvious question: Should software stocks, or any stocks for that matter, trade at 44 times forward sales? As a point of reference, the Nasdaq-100 index fetches just five times 2021 sales.
Using FactSet’s screening tools, and broadening the window a little, I found dozens of stocks trading at more than 35 times sales estimates for calendar 2021. The list on this page shows the highlights, including many of 2020s biggest winners:
Snowflake,
Shopify,
and
Cloudflare.
I’m not the only one starting to have reservations about the lofty multiples. The market’s reaction to tech earnings suggest that the doubts are mounting.
Zoom Video (ZM) is down 12% since reporting October-quarter earnings on Dec. 1, and it’s off 30% from its all-time high. It still trades for 36 times forward sales. Investors are worried that growth will ebb when the pandemic fades and people spend less time on video calls, but I’m not sure they’re worried enough.
Shopify (SHOP) has been an astonishing pandemic success story, and I’ve been too bearish. The e-commerce software company last week posted 94% revenue growth in the December quarter, as small businesses rushed to set up online storefronts. But Shopify also said top-line growth will moderate in 2020 as the pandemic winds down.
Heading into the earnings report, Shopify shares had rallied almost 30% year to date, more than tripling since the end of 2019. Last week, though, investors ignored the earnings beat, and the stock drifted 2% lower. With shares trading at…
Read More: Tech Stocks Look Too Pricey. And Wall Street Analysts Don’t Seem to Care.