When it comes to Technology stocks we are firmly in the Speculation Era. It is likely to stay that way for the near-term. October earnings calls may provide a bump in the road. Looming corporate tax increases will likely put an end to the bubble.
The combination of Trump tax cuts and the recent fiscal and monetary stimulus have inflated equity valuations over the past several years. This is especially true of Technology stocks where valuations have largely migrated to speculation territory. Fundamentals and company due diligence matter less. Fiscal and monetary policy guesswork matter far more (The Fed’s hand in particular has never been more intrusive).
If a Technology name trades above 20x cash earnings I’m not interested. During this recent Tech bubble many Technology names now trade above 20x revenue with earnings in triple-digit territory. For example, upcoming IPO Snowflake (tkr: SNOW), may price at a $30 billion valuation which implies a multiple of 113x CY’19 revenue (the company operates at a loss on FY’20 revenue of $265 million). Snowflake has a great growth profile, but when AWS, Azure and GCP are breathing down your neck, I’m not sure a 10x revenue multiple is warranted. There are many other examples of excess from Tesla (tkr: TSLA) to Zoom Video (tkr: ZM) to Datadog (tkr: DDOG) to Paycom (tkr: PAYC) to Coupa (tkr: COUP) among them.
The Tech bubble is likely to remain inflated until we get hit with a corporate tax increase. Both Trump and Biden will give us corporate tax increases. They will hurt more under Biden. We may hit another speed bump during the October earnings calls. We expect management teams to strike a cautious tone. That cautious tone in combination with a lack of fiscal stimulus would likely hit Tech valuations.