How to Value Technology Stocks?

Dear Reader,


Technology stocks have been notoriously difficult to value as the 2000-2001 dot com boom clearly showed.

In 2000 and 2001 technology stocks, which had no revenue, let alone profits were worth billions. After that their value just evaporated - they were worth  0(zero) USD. Pets.com and others are a good example. Yahoo's main business lost circa 90% of its value since 2000. But the dot com bubble gave the world companies like Amazon.com Inc.

Now some analysts also say we are in the late stages of a technology bubble. "This time is different". The technology companies have revenues, most Wall Street analysts say. Is it?

Let's have a look. High-growth, exciting technology stocks like Google Inc.(now Alphabet) and Facebook went public at a Market Capitalization to Revenue(Price/Sales) ratio of around 20. I am using Price/Sales ratio for comparison, since many of the exciting technology companies of today barely eke out profits.

After companies like Facebook and Alphabet mature they trade at price to sales ratios of around 7, reflecting their lower growth prospects due mainly to the size effect, since they cannot subsume the global economy. They can enter different industries, however, but that is another matter.

Now, this year there is  a huge line up of technology companies preparing to go public - Lyft, Uber, Pinterest, Palantir, Air BNB. Since these companies stayed much longer private they are quite bigger and the money raised could surpass the money raised in the late stages of the dot com bubble.

The companies above seem again about to be valued at Price/Sales of 20. Are they overvalued? Basically, yes. If the companies above do not turn out to be the next Facebook, Apple, Amazon or Google the will not grow into these lofty valuations. Many of the about to be listed technology unicorns(technology companies valued at more than 1 bln. USD) are still unprofitable after a decade of existence. Wall Street analysts will say - look at Amazon. But Amazon was growing at 20% + a year. And finally they make a profit. I still think Amazon is worth about 2/3 of its current market capitalization of 801.43 billion USD.

In short, I think several of the most hyped technology unicorn companies of today will not be around in 20 years. Just like in the 2000-2001 dot com boom and subsequent bust. If these moonshot companies do not land on the moon, which most of them will not, they will loose 90% to 100% of their value in five  to seven years. Just look at Zynga, GoPro,GroupOn etc. Yes, I do think we are in the late stages of a technology bubble, which will soon burst.

But some excellent technology companies will survive. As the boss of the largest fashion goods company LVMH said: "I know champagne is forever. I am not so sure about Facebook".

Disclaimer: The blogposts and comments on this blog and posts on social networks(Twitter, LinkedIn etc.) are not investment recommendation, are provided solely for informational purposes, and do not constitute an offer or solicitation to buy or sell any securities. The opinions expressed in the blogpost and posts on social networks(Twitter, LinkedIn etc.) are the author's and they in no way express the opinion or official position of the company where I am working currently!

Conflicts of interest: I may possess some of the securities,currencies or their derivatives mentioned in the blogpost and posts on social networks(Twitter, LinkedIn etc.)!

Kind regards,

Petar Posledovich