Snowflake began trading on the New York Stock Exchange on Sept. 16, 2020.
Courtesy of NYSE
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, C3.ai, Zoom Video Communications, Fiverr, 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 44 times sales, the valuation still seems strained. If you valued Amazon.com’s (AMZN) revenue at the same forward sales multiple, the company would be worth over $20 trillion.
Fiverr (FVRR), which operates an online marketplace for free-lancers, posted fourth-quarter sales of $56.7 million, up 89%, and it projects 2021 sales of $280 million, up 48%. Fiverr shares still sagged on the news—and why not?
Fiverr has rallied 1,200% since the end of 2019 and 57% year to date. Strangely, some of the recent surge seems tied to the company’s decision to pony up for a Super Bowl ad. Fiverr has rallied more than 30% since unveiling plans for the ad in mid-January, boosting its market cap by $2.6 billion. The ad spot cost Fiverr $8 million. (Ask Pets.com how its January 2000 Super Bowl ad worked out.)
Many of these tech stocks are so expensive that even significant selloffs haven’t done much to check their valuations.
Snowflake (SNOW), the cloud-based data-warehousing software company, trades for nearly 80 times estimated sales for the 2021 calendar year, and that’s with the stock down 32% from its December high of $429. At a current price around $300, the stock is still nearly triple its $120 initial public offering price just last September. The company reports earnings on March 3.
And that brings me back to Palantir. The stock jumped 15% Friday, to $29, but that’s only after a six-day losing streak in which it lost 35%, despite the Goldman upgrade.
The company’s latest earnings report showed strong demand from government clients, but disappointing commercial growth. Meanwhile, a post-listing lockup expiration allowed many employees and early investors to sell their shares—not a terrible idea given how much the stock has moved.
In November, I laid out a bullish case for Micron Technology (MU). As I noted then, there’s growing demand for the company’s memory chips for cars, cloud computing, 5G phones, and PCs. I wrote that the stock could double over time. It’s already rallied 57%, to a recent $91. Last week, Citi analyst Christopher Danely wrote that with memory supplies tightening and prices rising, profits should explode, from an estimated $3.62 a share in the August 2021 fiscal year, to $10.64 in fiscal 2022, and $15.83 in fiscal 2023. And the stock? He thinks it could hit $150.
I’ve also been consistently bullish on SoftBank (SFTBY)—both in this column and elsewhere in Barron’s—and over time it’s proven to be the right call. There were some dark moments last spring when the stock got cut in half. But a combination of asset sales, buybacks, and improved performance for the $100 billion SoftBank Vision Fund has turned things around. Now the Vision Fund is poised for its biggest exit yet.
Coupang, a Korean e-commerce giant, has filed for a U.S. IPO. SoftBank owns 37% of the company. With revenue comparable to eBay (EBAY) but growing 90%, count on a lofty valuation. SoftBank’s stake could be worth $20 billion or more.
Last week, SoftBank shares set a new high, quadrupling from the March lows. With a portfolio full of IPO candidates, the stock could keep rising.
Write to Eric J. Savitz at [email protected]
