BIG TECH FUNDAMENTALS IN PERSPECTIVE
Have the share price moves in the big tech stocks been justified through the global pandemic? Lets dive into some of the most important big tech fundamentals.
“The world has changed” is what everyone says since the global pandemic was declared by the World Health Organization on 11 March 2020. However how has the global pandemic changed some of the big tech leaders in terms of earnings and share values? Well clearly, technology companies have benefitted. Global equities as measured by the MSCI are up 32% from pre pandemic levels (mid-February 2020) whilst the technology sector as measured by the Vanguard Technology ETF (VGT) is up 66%. So, is this appreciation in tech share prices justified? And have we seen excessive multiple expansion?
To dig a little deeper, we have looked at the ten largest global tech stocks that account for about 17% of the MSCI world index. We compared their earnings and valuation changes over 21 months since February 10, 2020 - just before we really knew about Covid 19’s implications, and pre the collapse in equities in the following months.
The enterprise value of these ten stocks has doubled from US$6 trillion to US$12.2 trillion – however operating profits have risen a staggering 80% from $207 billion to $372 billion on a trailing twelve months (TTM) basis. In that time the big tech leaders have experienced 30% expansion in earnings multiple as measured the Price/Cash Flow from 21x to 27x 2021 TTM.
If we compare the change in valuation to that of the US 10-year bond which has fallen from 2.22% to 1.56% and compare this move to the change in big tech Cash Flow Yield, the US 10- year bonds has fallen by 30% whilst the big tech Cash Flow Yield has declined by 19%. So broadly speaking, a re-rating of multiples of say 20-30% would appear justified and fundamentally based.
If one also considers that the pandemic has caused considerable structural changes to economies, such as more flexible working environments, an accelerated shift to online commerce, growth in cloud services all of which has resulted in the digitalization of the global economy we could argue the re-rating of these global leaders in technology has been warranted.
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