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  1. Home
  2. / Investing
  3. / Stocks

Jim Cramer: I'm Not Buying This Tech Multiple Expansion

This is hope, not fact -- don't pay more for the same old thing.
By JIM CRAMER Mar 13, 2019 | 07:39 AM EDT
Stocks quotes in this article: GOOGL, FB, AAPL, V, MA, PYPL, NOW, CSCO, SPLK, CRM, AMZN, KR, CVS, WBA

Can it all be greater fool? I am talking about the incredible margin expansion we are seeing in so many stocks right now. But is this margin expansion simply paying more for the same old thing?

The most visible cases of margin expansion right now are Apple (AAPL) , Facebook (FB) and Alphabet (GOOGL) .

How can I tell this?

Because what's happened at Apple from its low of $142 at the beginning of the year to $180 now? The only thing I can see is data showing that iPhone shipments to China have kept plummeting. To me, it is simply that investors looked at Apple and decide that the combination of weaker cellphones and stronger services revenue equals a higher price?

How about Facebook? What's new there? I think the only thing I have spied is that Mark Zuckerberg has become determined to rid Facebook of the impression it sells your data, to the point where he has potentially cut back revenue and reduced gross margins. I can't figure out how it has gone from $123 in ignominy to $171 in glory? That potential crimping of revenue and earnings is worth paying more for? I would argue the other way around, but that's multiple expansion at work.

Alphabet may be the most grotesque of all of these three. It has tacked on about 200 points from its end of the year bottom and the only thing we have received is an earnings report that generated no enthusiasm whatsoever, as the company still seems under attack from the decline in the amount of money from search.

Is that a revaluation of Waymo? Is it about some credit for the massive health initiatives that it has embarked on pretty much in secret? I mean how much do we know about Verily, its health arm. Or the parent above that is run by the incredibly smart David Feinburg, lately of the most progressive health care operation I know, Geisinger in Pennsylvania? I can't find a thing that's gone right or positive for Alphabet since what was regarded as a pretty disappointing quarter.

How about fintech? Has that been running like mad? I think multiple expansion is behind the Visa (V) run from $121 to $151 since year end. We have loved Mastercard (MA) and its gallop from $174 to $226 -- and the quarter showed good growth, but not enough to merit this move.

Paypal (PYPL) may be the most egregious of all -- $76 to $97 on a quarter widely panned, of all things. But that's the collective decision by the marketplace to pay more for financial technology while paying less for traditional banking, as those multiples have collapsed.

I think that this is part and parcel with a recognition that digitization is worth more than people think and these companies are the heart of it. So are the accoutrements, like ServiceNow (NOW) , which has roared from $158 to $238, or Splunk (SPLK) , from $90 to $124, or Salesforce (CRM) , from $121 to $158, or even Cisco Systems (CSCO) , from $40 to $52.

I know some stocks have seen a massive compression, including those that are up against Amazon (AMZN)  -- like Kroger (KR) , which has gone from $31 in November down to $24, CVS (CVS) , $79 to $54, and Walgreens (WBA) , from $85 to $61. But at least we know they reported a very disappointing quarter. You can't say the same for the others. They are just levitating on endless re-ratings and a belief that things continue to get better, although only Visa, Mastercard and Paypal have shown a continued progression of higher-than-average growth and a re-acceleration of what they had when they were much smaller companies.

My conclusion? I don't trust multiple expansion, not that I am necessarily drawn to multiple contraction, lest I stumble on a value trip, although I think CVS's merger with Aetna doesn't produce a black hole as much as a rebirth.

And if I didn't believe so strongly in the long term of those we are paying more for, I would probably do some trimming of those that have had rallies based on hope. It's just not what I like to see. High earnings, and higher forecasts, equal higher stock prices. The rest is just hope -- and as I always say, hope should not be part of the equation.

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At the time of publication, Action Alerts Plus, which Cramer co-manages as a charitable organization, was long FB, AAPL, AMZN, CSCO, CVS, CRM, GOOGL.

TAGS: Investing | Stocks |

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