Chief Economist’s note: How good is US tech?

All the 5 US mega-caps released reports this week and the reports were great. Accidentally all these companies are seen as growth/tech ones (making up some 40% of the Nasdaq100!) that actually gained on the pandemic. The question is: are these great earnings matching hefty stock price gains?

You’ve probably seen all headlines how Apple, Alphabet, Facebook, Microsoft and Amazon beat the expectations. Forget about it, for some mysterious reasons, “analysts expectations” are always sufficiently low that it’s easy for companies to “beat” them. What we want to see is progress in results and compare it to progress in stock prices.   

Let’s start from results – they are impressive. Never since the beginning of 2014 these 5 companies combined saw negative annual earnings growth or revenue growth less than 10%. Furthermore, we can see that pandemic only slowed earnings growth at the beginning but there was never a big dive so fantastic Q1’21 results (nearly 60% earnings growth and 26% revenue growth) are not the effect of low base. We also can see that average annual revenue growth per share is around 20%, way outpacing nominal US GDP (or World GDP) growth and the acceleration confirms that companies gained on the pandemic.

Top 5 US megacaps delivered amazing results. Source: Bloomberg, XTB Research

At the same time these stocks are not cheap by any measure. Despite strong earnings growth we can see that combined P/E increased from as low as 16 in 2012/13 to around 35 currently – more than 100%. Price to Sales was fairly stable at around 4 between 2012 and 2016 but then took off to around 7 now.

At the same time valuation increased by some 100% over the past decade. Source: Bloomberg, XTB Research

As puzzling at it might seem, these stocks are both great and looking overvalued now. This doesn’t mean that their valuations must return to lower levels. Those companies are at the forefront of the technological change that will be continued and actually external factors like regulation or rapid increase in bond yields could be the biggest risks.