Technology-stock valuations are returning to Earth – MarketWatch

This post was originally published on this site

Many of the best-known technology stocks have suffered in recent weeks. But the declines in price-to-earnings ratios have been even sharper. Which means some of those same stocks have gotten relatively more attractive.

The S&P 500 Index SPX, +0.85%  has been hit hard this earnings season, pulled down by the information-technology sector. Here are total returns for both from the end of September through Oct. 29:

FactSet

The S&P 500 was down 9.3% from Sept. 28 through Oct. 29 (with dividends reinvested), while the S&P 500 information-technology sector was down 11.2%.

Now look at the declines in forward price-to-earnings (P/E) ratios based on consensus earnings estimates for the following 12 months among analysts polled by FactSet:

FactSet

The forward price-to-earnings ratio (based on EPS estimates for the following 12 months among analysts polled by FactSet) declined to 15.3 from 16.9 for the S&P 500 from Sept. 28 through Oct. 29 and to 16.4 from 18.3 for the S&P 500 information-technology sector.

Tech valuations have declined faster than that of the benchmark index. This is easily illustrated by two tech high-flyers that are not actually included in the information-technology sector by S&P Dow Jones Indices. Amazon.com AMZN, -1.00% is in the consumer-discretionary sector and Netflix NFLX, -0.39%  is in the new communications-services sector.

Both companies have had very high P/E ratios for many years as investors have traditionally rewarded the pioneering aspects of the companies’ businesses and their rapid growth. But check out these figures for the two:

Total return – Sept. 28 through Oct. 29 Forward P/E ratio – Sept. 28 Forward P/E ratio – Oct. 29
Amazon.com -23% 97.9 65.1
Netflix -24% 111.7 84.5
Source: FactSet

Investors initially reacted well to Netflix’s third-quarter earnings report, although analyst reaction was mixed and the company’s bond offering received a low rating. Amazon disappointed investors with its third-quarter results, even though its sales were up 29% from a year earlier. We have seen similar downturns for both stocks over the years, only to watch them rebound. But there’s no question those valuations remain very high, and there’s no way to predict when investors will look more at profits, rather than sales growth, when assessing the worth of both companies’ shares. There’s also no way to predict how severe this tech rout will be.

Also see: AMD’s poor outlook, crypto-chip slowdown intensify swoon in semiconductor sector

Tech stocks with declines in P/E ratios

There are 66 companies in the S&P 500 information-technology sector. If we add Amazon and Netflix, three video game developers, Twitter TWTR, +6.55% Facebook FB, +1.13%  and Google holding company Alphabet GOOG, +0.77% GOOGL, +0.60%  we have 74 S&P 500 “tech” companies.

Forward P/E ratios have declined for all but two during October, including Red Hat RHT, -0.05% which has agreed to be acquired by International Business Machines IBM, -2.26%  for a 63% cash premium, and Western Digital Corp. WDC, +0.57% whose forward P/E ratio increased to a relatively low 6.4 as of the close on Oct. 29 from 5.2 at the end of September, even though the shares declined 7%.

Here’s how valuations for the 72 remaining S&P 500 tech companies have dropped in October. They are sorted by their forward P/E ratios at the end of September:

Company Ticker Industry Forward P/E – Sept. 28 Forward P/E – Oct. 29 Total return – Sept. 28 through Oct. 29 Total return – 2018 through Oct. 29
Netflix Inc. NFLX, -0.39% Cable/Satellite TV 111.7 84.5 -24% 48%
Amazon.com Inc. AMZN, -1.00% Internet Retail 97.9 65.1 -23% 32%
Autodesk Inc. ADSK, +1.54% Software 79.2 63.0 -20% 18%
Salesforce.com Inc. CRM, +0.87% Software 67.1 55.2 -18% 28%
Advanced Micro Devices Inc. AMD, +0.45% Semiconductors 62.2 32.0 -45% 64%
Fortinet Inc. FTNT, +1.91% Computer Communications 52.1 43.5 -16% 77%
Twitter Inc. TWTR, +6.55% Internet Software/Services 40.4 38.5 14% 35%
Gartner Inc. IT, +1.41% Miscellaneous Commercial Services 39.8 35.6 -11% 14%
Nvidia Corp. NVDA, +4.21% Semiconductors 39.1 25.9 -34% -4%
ANSYS Inc. ANSS, +1.77% Software 36.2 28.0 -23% -3%
Adobe Inc. ADBE, -1.03% Software 35.5 31.1 -11% 37%
Intuit Inc. INTU, +1.40% Software 35.1 31.0 -12% 28%
PayPal Holdings Inc. PYPL, -0.35% Data Processing Services 34.3 29.8 -8% 10%
Arista Networks Inc. ANET, +3.32% Computer Communications 34.2 28.1 -18% -8%
VeriSign Inc. VRSN, +2.06% Internet Software/Services 32.4 26.4 -15% 18%
Mastercard Inc. Class A MA, -1.73% Miscellaneous Commercial Services 32.4 27.8 -14% 27%
Visa Inc. Class A V, -1.62% Miscellaneous Commercial Services 29.5 25.2 -11% 18%
Automatic Data Processing Inc. ADP, +0.44% Data Processing Services 29.1 26.1 -10% 17%
Broadridge Financial Solutions Inc. BR, +0.99% Miscellaneous Commercial Services 28.3 24.2 -14% 26%
Activision Blizzard Inc. ATVI, +2.18% Recreational Products 28.2 22.6 -22% 4%
Alphabet Inc. Class A GOOGL, +0.60% Internet Software/Services 27.7 23.1 -14% -2%
Xilinx Inc. XLNX, +2.37% Semiconductors 26.8 23.5 -2% 18%
Microsoft Corp. MSFT, -1.32% Software 26.8 23.2 -9% 23%
FLIR Systems Inc. FLIR, -14.31% Aerospace & Defense 26.7 23.1 -13% 15%
Cadence Design Systems Inc. CDNS, +0.41% Electronic Production Equipment 26.3 23.1 -2% 6%
Paychex Inc. PAYX, +0.47% Data Processing Services 25.9 22.0 -13% -4%
Synopsys Inc. SNPS, +0.94% Software 25.2 22.2 -12% 2%
Electronic Arts Inc. EA, +2.37% Recreational Products 25.1 19.1 -24% -13%
Take-Two Interactive Software Inc. TTWO, +9.56% Recreational Products 25.0 20.8 -19% 2%
Fiserv Inc. FISV, +0.73% Data Processing Services 25.0 23.4 -6% 18%
Amphenol Corp. Class A APH, +2.21% Electronic Components 24.9 21.8 -9% -2%
Accenture PLC Class A ACN, +0.73% Information Technology Services 23.6 21.2 -9% 2%
Global Payments Inc. GPN, +2.04% Data Processing Services 23.1 19.7 -15% 9%
Facebook Inc. Class A FB, +1.13% Internet Software/Services 22.7 19.8 -14% -19%
Total System Services Inc. TSS, -0.58% Data Processing Services 21.6 18.8 -10% 13%
FleetCor Technologies Inc. FLT, +0.38% Miscellaneous Commercial Services 20.5 16.5 -20% -5%
Akamai Technologies Inc. AKAM, +15.97% Internet Software/Services 20.4 16.0 -15% -5%
Fidelity National Information Services Inc. FIS, +3.89% Data Processing Services 19.8 18.0 -9% 6%
Citrix Systems Inc. CTXS, +0.56% Software 19.8 17.2 -9% 15%
NetApp Inc. NTAP, +5.16% Computer Peripherals 19.5 16.3 -16% 32%
F5 Networks Inc. FFIV, +1.30% Computer Communications 19.4 15.8 -15% 28%
IPG Photonics Corp. IPGP, +2.80% Electronic Equipment/Instruments 19.3 17.7 -16% -39%
Qualcomm Inc. QCOM, +1.51% Telecommunications Equipment 19.1 16.7 -14% 0%
Motorola Solutions Inc. MSI, +0.99% Aerospace & Defense 18.6 16.7 -10% 31%
Texas Instruments Inc. TXN, +2.38% Semiconductors 18.5 16.7 -16% -12%
Corning Inc. GLW, +1.60% Electronic Components 18.1 15.1 -13% -3%
Apple Inc. AAPL, +0.40% Telecommunications Equipment 16.9 15.8 -6% 27%
Cognizant Technology Solutions Corp. Class A CTSH, -4.72% Information Technology Services 16.3 14.2 -10% -2%
Cisco Systems Inc. CSCO, +1.23% Computer Communications 16.2 14.6 -9% 18%
Juniper Networks Inc. JNPR, +1.64% Computer Communications 15.9 14.0 -6% 0%
Analog Devices Inc. ADI, +1.82% Semiconductors 15.8 13.8 -13% -8%
CA Inc. CA, +0.20% Software 15.7 15.6 0% 35%
TE Connectivity Ltd. TEL, +2.46% Electronic Components 15.2 13.2 -14% -19%
Oracle Corp. ORCL, +2.17% Software 14.9 13.6 -8% 1%
Symantec Corp. SYMC, -1.22% Software 13.5 11.5 -15% -35%
HP Inc. HPQ, +2.35% Computer Processing Hardware 12.1 10.8 -11% 11%
Skyworks Solutions Inc. SWKS, +2.03% Semiconductors 11.9 10.7 -10% -13%
Broadcom Inc. AVGO, +2.91% Semiconductors 11.6 10.0 -14% -16%
Qorvo Inc. QRVO, +1.02% Semiconductors 11.5 10.4 -10% 4%
Intel Corp. INTC, +4.16% Semiconductors 11.4 10.0 -4% 0%
KLA-Tencor Corp. KLAC, +6.61% Electronic Production Equipment 11.3 9.9 -16% -17%
Microchip Technology Inc. MCHP, +3.36% Semiconductors 11.3 9.1 -21% -28%
DXC Technology Co. DXC, +1.90% Data Processing Services 11.2 8.3 -26% -15%
International Business Machines Corp. IBM, -2.26% Information Technology Services 11.0 8.6 -21% -19%
Hewlett Packard Enterprise Co. HPE, +1.41% Computer Processing Hardware 10.5 9.4 -11% 3%
Western Union Co. WU, +0.57% Miscellaneous Commercial Services 10.2 9.4 -8% -5%
Lam Research Corp. LRCX, +2.11% Electronic Production Equipment 10.2 9.2 -10% -25%
Alliance Data Systems Corp. ADS, +0.02% Data Processing Services 9.6 8.1 -15% -20%
Applied Materials Inc. AMAT, +2.73% Electronic Production Equipment 9.5 8.0 -19% -38%
Xerox Corp. XRX, +1.89% Computer Peripherals 8.1 8.0 2% -3%
Seagate Technology PLC STX, +1.82% Computer Peripherals 7.6 6.3 -20% -6%
Micron Technology Inc. MU, +2.01% Semiconductors 4.3 3.3 -23% -16%
Source: FactSet

You can click on the tickers for more about each company, including earnings and news coverage, charts, ratings and financials.

Don’t miss: Tesla’s success underscores the tremendous bargain of GM’s shares

Create an email alert for Philip van Doorn’s Deep Dive columns here.