For investors hoping to get in early on the next Amazon.com Inc. (AMZN) or Netflix Inc. (NFLX), one Wall Street vet has compiled a handful of tips for buying and selling internet industry stocks based on his own failures and successes, as outlined in a Fortune report. (See also: 4 Overlooked Blue Chip Winners.)
Well known market watcher Mark Mahaney of RBC Capital Markets spoke at Fortune’s Brainstorm Tech conference in Aspen, Colorado, on Tuesday, offering portfolio advice at a time when many investors are becoming more skeptical of the tech industry’s lofty valuations amid a nearly decadelong bull market. The S&P 500 Information Technology Index has returned 31% over the last six months, compared to the broader S&P 500’s 15% gain over the same period. Bears have warned that the market has become too growth oriented, paying less attention to valuations and causing the price to earnings (P/E) ratios of tech stocks to skyrocket compared to the broader market.
Amazon, up over 57% year-to-date (YTD) trades at a P/E ratio of 231.8, compared to the average S&P 500 company at 24.4 times. Netflix, up more than 97% YTD, trades at a P/E multiple of 254.5.
3 Sell Signals
In a presentation named “10 Lessons, 10 Minutes: The Perils of Stock Picking in Tech,” Mahaney highlighted four indicators that a tech firm is in an unstable place. His first sell signal is if a company makes an unsuitable acquisition, such as eBay Inc.’s (EBAY) purchase of Skype in 2005, as reported by Fortune.
Other risk factors include a sharp deceleration in revenue growth, and a high turnover rate in a company’s leadership team. Lastly, a firm could be in trouble it if acquires stadium naming rights. For example, tech company CMGI, the company behind the now-defunct search engine Alta Vista, had its name removed from pro sports stadiums when it failed to hold up to its sponsorship agreements.
Buy Tech on Pop Influence
Mahaney recommends that investors keep a sharp eye on tech companies quickly sneaking their way into the daily vernacular, such as Netflix, Google parent company Alphabet Inc. (GOOGL) and Snap Inc. (SNAP).
When a firm’s name begins to do show up frequently in popular culture, “it’s a really good time to invest in the stock,” stated the RBC senior tech analyst. When this happens, company sales are not only boosted by more purchases, but marketing and advertising costs should be reduced as consumers already have the name in mind, according to Mahaney. (See also: ‘Stealth Bull Market’ May Push Stocks to New Highs.)