A few Big Tech stocks have soared recently. Love them or hate them, their valuations still make sense.
In the past month, Tesla (ticker: TSLA) stock has shot up 31% and Microsoft (MSFT) stock has popped 14%. Other Big Tech stocks—while not rising as fiercely—have still enjoyed a solid run. Apple (AAPL), Meta Platforms (FB), Amazon.com (AMZN) and Alphabet (GOOGL) have all gained between 3% and 10% in the past month.
That run has sent valuations of some tech titans into the stratosphere. Tesla now trades at 131 times the next 12 months of projected earnings per share, above the 115 times it traded at a month ago, according to FactSet. Amazon’s multiple has risen to 69 times from 52. Microsoft now trades at 34.7 times, up from 32.2 times. Apple, Google and Meta Platforms (FB)—all trading between 23 and 27 times—have seen their multiples rise as much as 11%.
But investors know what they’re paying for a stream of profits that’s still exploding. That group of stocks is expected to see EPS grow 70% in 2022 compared with 2019—or prepandemic—results, according to DataTrek. Tesla analysts expect to see the company’s EPS rise to over $8 from break-even in 2019. while the earnings multiple has risen just over 2 times since the start of 2019, according to FactSet. Microsoft is expected to post 2022 EPS that are 88% above its 2019 result, while the stock’s multiple has only risen 62% since the beginning of 2019. The rest of the group has seen their earnings grow faster than their valuations, except for Apple.
That, on its own, doesn’t mean these stocks are great buys. Indeed, these companies’ earnings growth is largely expected to decelerate for the next several years.
Even so, the earnings growth could still be strong enough to support current valuations. These stocks’ earnings multiples compared with expected earnings growth are still not out of hand, historically speaking. Alphabet’s PEG ratio—or its price/earnings ratio divided by its expected earnings growth rate—is 1.1 times. That’s below the 1.6 times the stock has averaged in the past five years. Meta Platforms’ PEG ratio of 1.1 times is in line with its history. Microsoft’s 2.1 times is also in line with its history. Amazon’s and Apple’s are a touch above their averages. Tesla’s is a bit below its historical average, though its history of having any profits at all is short.
Ultimately, whether Big Tech valuations are a bit too high or not, they’re nowhere near out of control.
