Big Tech valuations are re-entering the real world
Punching virtual timecards
A basket of nine tech giants, also including Nvidia, Baidu,and Facebook parent Meta Platforms, boasts an average price-to-earnings ratio of around 27 times. That’s still noticeably higher than the average of nine industrial companies, including General Electric, Honeywell International, and Siemens, of around 17 times. But that spread has come down considerably. Five years ago, the ratios were 42 and 19 times respectively.
Before investors started losing their optimism, the Silicon Valley giants and their peers could do little wrong. The companies transformed how people buy things, store data, and entertain themselves, and they were rewarded for their fast-growing, scalable businesses. But above-market growth, boosted by stay-at-home Covid-19 habits, can’t last forever.
Last month, Netflix architect Reed Hastings blamed competition, in part, for slowing subscriber growth. Amazon finance chief Brian Olsavsky said that the cost to ship goods overseas doubled compared to pre-pandemic rates. Microsoft and Google owner Alphabet are hiring rapidly in a fiercely competitive environment for employees. Tech-sector companies in the S&P 500 Index have so far reported revenue growth of 13% in this year’s first quarter from a year earlier, while industrial firms’ top lines are up 40%, according to Refinitiv data.
That sounds an awful lot like the issues hitting companies that have been around for ages. Illinois-based Caterpillar boss James Umpleby said that margins are under pressure as a result of inflationary impacts on manufacturing costs. Supply chain challenges are a drag on Minnesota-based 3M’s businesses, just as on Apple’s. UPS is dealing with labor cost increases.
The technology powerhouses may achieve faster growth than old-line groups. But as they mature their services are no longer new and disruptive. The endgame is that they become part of the portfolio of businesses that support an economy, and the pace of their growth aligns with that. Investors are more likely to see that in their crystal balls when they’ve been brought down to earth.