As the markets plunged again on Friday, something else was happening to many high-flying stocks such as Apple (AAPL) – Get a report: Their generally fiery assessments were brought back to earth.
This is a trend worth watching, because as the market swings between relief and panic overnight, the underlying reality of stocks is that they have been bought at levels high in the current rout of the market. Now that the valuations are going down, thinking how far down they could be may be a sign of the decline in stock prices.
Consider Apple. Since the end of August, just before the unveiling of the new iPhone 11 models and its new television channel “Apple TV +”, during the first half of February, Apple’s shares have climbed by more than 58%. The stock’s valuation at that time, based on the forward price, went from around 16 times the profit for the next 12 months to 23 times.
Putting a multiple 16 times similar to current estimates would give a share price of $ 225.60, a cut of 21% from here. Whether this happens depends on a number of factors, such as the current form of the spread of COVID-19, the course of election year policies, the global macroeconomic outlook and, as always, the cycle of this year’s iPhone hype.
Consider other potential evaluation resets, based on a variety of evaluation parameters. Okta enterprise authentication software creator (OKTA) – Get a report is unprofitable and may not be profitable until the year ending January 2023. The preferred measure is a multiple of its sales forecast for the next twelve months. That’s 18.5 times quite high, well above, for example, an old software name like Microsoft (MSFT) – Get a report, which recovers only 8.5 times the sales.
If Okta’s valuation were to drop to a recent low of around 16.5 times, like Apple, it could bring the stock price to its September level, around $ 105 per share, a drop an additional 14% from here.
Speaking of Microsoft, its own multiple P / E on forward profits has been zooming in for years now. Maybe Microsoft, despite a recent downturn in its outlook, will remain the safe harbor in the current storm, but not necessarily.
Microsoft is currently recovering 26 times the expected profits for the next twelve months. This is well below 31 times before the recent market turmoil, but also well above 20 times at the end of 2018, when Microsoft’s forecasted revenue growth was actually higher. Reducing to a multiple of 20 times for Microsoft would mean a share price of $ 120, a quarter less than the current price.
One of the most amazing tech winners of 2019 was the Roku video ad sensation (ROKU) – Get a report, more than quadruple the price. Like Okta, Roku is not yet profitable on a net basis, so it is evaluated on other parameters such as the enterprise value (market capitalization plus net debt) divided by the profit before the cost of interest, the taxes and depreciation and amortization, otherwise known as “EV to Ebitda.”
At $ 99.40 recently, the Roku share has lost all its gains since the end of September, but its EV towards Ebitda is still close to 600 times, well above the 172 times it was in September because its prospects on Ebitda have subsequently dropped. Even without continued valuation, a simple haircut at 300 times would cut the inventory in half to $ 51.
Perhaps the most glaring recent rise in valuation is Tesla (TSLA) – Get a report, whose stock has more than tripled since September, even after the recent declines. During this period, the share’s EV to Ebitda increased from 18 to 30 times. If the stock were now to fall at this previous valuation, it would be a 60% drop in the price.
It’s not just the more showy names that could take a hit. Applied materials (AMAT) – Get a report, the world’s largest supplier of chip manufacturing equipment and chip manufacturer DRAM Micron Technology (MU) – Get a report, are not particularly expensive compared to the overall market, trading at 13 times earnings per share forward and 12.5 times respectively. But as recently as the summer, before investors began to bet on a flip-flop, they were trading at 11x and 8x profit respectively, respectively. Concerns about the macroeconomy and the spread of Covid-19 could reduce these two estimates to what they were when the outlook was not so good.
And this offers an important final reflection for all technological titles. If the economic outlook suffers, it could hit revenue and profit estimates, making stocks even more expensive and leading to even stronger selling pressure. At this point, the possibilities offered here might seem relatively rosy.
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