With many tech investors having recently returned to their bad 2020/2021 habits -- such as ignoring valuations when it comes to their favorite companies, and piling into anything seen as a play on a promising technology -- there are at least a few parts of the tech sector that look frothy again.
At the same time, there are some other areas in tech where one can find companies that have arguably gotten oversold due to recession fears.
Here's a look at three parts of tech where valuations still look pretty rich, and two parts where I think deals can still be found.
3 Richly Valued Parts of Tech
1. Internet Growth Stocks That Have Been Chased Higher - Think companies such as Roblox (RBLX) , The Trade Desk (TTD) and Duolingo (DUOL) . These generally aren't bad businesses, but they've been bid up to very rich valuations as investors once more decide that any price is worth paying for secular growth.
The Trade Desk, for example, trades for 52 times its 2023 non-GAAP EPS consensus (a figure that excludes significant stock compensation expenses), even though a softer online ad market is (for now) leading its growth to decelerate into the teens. Roblox and Duolingo, which for now are unprofitable due to aggressive spending and (in Roblox's case) large infrastructure and operational costs, respectively have enterprise values (EVs) equal to 7 times and 10 times their 2023 sales consensus estimates.
2. High-Multiple Fabless Chip Suppliers - Historically, growing fabless chip companies -- that is, chip suppliers that outsource manufacturing to foundries such as Taiwan Semiconductor (TSM) -- have received a valuation premium relative to peers that own their own fabs, due to their lower fixed costs and reinvestment needs. But valuations have nonetheless gotten out of hand for some names.
Nvidia (NVDA) , buoyed by generative AI hype, now trades for 60 times its non-GAAP EPS consensus and 22 times its EV/sales consensus for fiscal 2024 (ends in Jan. 2024). Admittedly, those estimates could prove conservative, as tech giants dial up their AI-related capex and VCs pour a ton of money into generative AI startups. But it's fair to say that Nvidia, which still gets a large chunk of its revenue from gaming and workstation GPU sales, is now pricing in a lot of future growth.
Separately, programmable chip supplier Lattice Semiconductor (LSCC) now trades for 44 times its non-GAAP EPS consensus and 17 times its EV/sales consensus for 2023. And driver-assistance processor supplier Mobileye (MBLY) trades for 47 times its non-GAAP EPS consensus and 14 times its EV/sales consensus for 2023.
3. Cash-Burning Electric-Car and Fuel-Cell Plays - Unlike the companies in the first two categories, the shares of many of the firms in this category have struggled over the last two months and aren't far from their 52-week lows. Nonetheless, they generally still look pretty overvalued, particularly given that a lot of them aren't certain to ever turn a profit.
Lucid Group (LCID) , which is still worth $14 billion, expects to make just 10,000 to 14,000 vehicles this year and disclosed on its Q4 earnings call that its $4.9 billion in cash and credit facilities might not last it beyond Q1 2024. Rivian (RIVN) , which is worth $15 billion, expects to make 50,000 cars this year. But it also issued guidance in late February that suggests the company will burn through more than $6 billion this year, or more than half of the $12.1 billion in cash it had at the end of 2022 (Rivian raised $1.3 billion in March through a convertible debt offering to shore up its balance sheet a bit).
Hydrogen fuel-cell plays Plug Power (PLUG) , Ballard Power (BLDP) and FuelCell Energy (FCEL) are also generating sizable losses while operating low-margin businesses in highly-competitive environments. As are EV charging plays such as ChargePoint (CHPT) , Blink Charging (BLNK) and EVgo (EVGO) .
2 Parts of Tech That Look Inexpensive
1. Low-P/E Hardware OEMs with Differentiated Products - These are companies whose shares have been hit by a mixture of recession fears and worries about cyclical demand headwinds as their order backlogs (which often soared in 2021/2022 amid supply constraints) normalize. But the firms, some of which have high short interests that can provide fuel for future rallies, also have clear medium/long-term growth drivers and valuations that provide some margin of error.
Clearfield (CLFD) , a provider of fiber management/enclosure hardware, trades for just 11 times its fiscal 2023 (ends in Sep. 2023) GAAP EPS consensus in spite of being expected (per FactSet consensus estimates) to see 20%-plus sales growth through fiscal 2025 on the back of large carrier investments (aided by rural broadband subsidies) in last-mile fiber projects.
Flash storage array provider Pure Storage (PSTG) , which has been taking share for years and whose new, low-cost, FlashBlade//E line could help it gain more ground against hard drive-based storage arrays, has an EV equal to less than 12 times its trailing free cash flow (FCF) of $609 million.
And though its run-up over the last 12 months does make it vulnerable to seeing additional profit-taking, server OEM SuperMicro (SMCI) , which has been taking share with the help of well-engineered products that have appealed to cloud service providers (including ones making large AI-related investments), still trades for 10 times a fiscal 2023 (ends in June 2023) GAAP EPS consensus of $10.25.
2. Select Large-Cap Consumer Internet Stocks - While some Internet stocks look frothy again, deals can be found among large-caps that have been stung by recession/cyclical fears and which can benefit in an inflationary environment from higher ad prices and/or transaction volumes.
Alphabet (GOOGL) , which has been hit by both recession fears and what I think are overblown worries about the impact of an AI-infused Microsoft (MSFT) Bing on its search market share, trades for 21 times its 2022 GAAP EPS consensus. And that multiple would be lower if not for the losses produced by Alphabet's Cloud and "Other Bets" segments (also, it could go lower if Google, which has taken some steps lately to cut spending, gets more aggressive about cost-cutting).
PayPal (PYPL) now has an EV equal to less than 13 times its 2023 FCF consensus -- a pretty reasonable valuation for a company whose core user base has (in spite of intensifying competition) has remained fairly sticky and whose Venmo and Braintree continue seeing healthy growth. And though not especially cheap (or expensive) when valued based on EPS and FCF, I think Pinterest (PINS) , which I wrote about in January, still doesn't have a bad risk/reward, given its headroom for improving monetization and the potential for a new CEO and an activist investor to unlock additional value.
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