The strong performance of technology stocks has drawn excitement as well as skepticism among investors this year. Market performance has been especially narrow: consider that the top five drivers in the S&P 500 (Nvidia, Microsoft, Facebook, Amazon and Apple) have contributed 11 per cent of the index’s year-to-date returns, a bigger share than ever before. And most technology stocks have outperformed the S&P’s relatively modest 5 per cent year-to-date return.
But drill down into the numbers and it becomes clear that even within tech, the valuation picture is mixed. This week’s Chart Room shows a wide dispersion in valuations among S&P 500 stocks in the internet, software, hardware and semiconductor space. Our proprietary valuation score uses forward price-to-earnings relative to the overall index, enterprise value-to-sales, and price-to-book ratios, then compares the average of these measures to the company’s history of up to 15 years. The result is a decile score, with a 1 meaning it’s in the bottom 10 per cent of its valuation history.
While it may not be surprising that many tech companies are at the high end of their historical valuations, it is quite revealing to note the lineup of names that have seen strong recent returns but are still closer to the low end of their historical valuations; that includes giants like Facebook and Alphabet.