High-growth tech stocks are among some of the market’s top performers in recent years. However, their breakneck gains have also made them dangerous to hold ahead of the upcoming fourth-quarter earnings season.
Way back in 2000, at the height of the dot com bubble, Wharton School professor of finance Jeremy Siegel wrote a story for the Wall Street Journal calling large-cap stocks a “sucker bet.”
Siegel focused on some of the hottest, most popular tech stocks at the time, including Nortel Networks (which later filed for bankruptcy protection), Cisco Systems, Inc. (NASDAQ:CSCO) and Yahoo! Inc. (NASDAQ:YHOO). Siegel pointed out that all of the stocks mentioned had price-to-earnings ratios above 100 — historically, a valuation that has been unsustainable for large-cap stocks.
“History has shown that whenever companies, no matter how great, get priced above 50 to 60 times earnings, buyer beware,” Siegel wrote.
Of course, less than a year later, all of the stocks he mentioned crashed during the bubble bursting.
Any student of market history can see that when large-cap stocks get overpriced to such an extreme, they subsequently lag the S&P 500 — sometimes for a considerable time. And all it takes is a spark.
Here are three large-cap tech stocks that trade at more than 100 times earnings and could take a serious tumble on any whiff of worry — including upcoming earnings reports.
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Tech Stocks To Sell: Amazon (AMZN)
Trailing 12-Month P/E: 188
Forward P/E: 93
Next Earnings Report: Jan. 26
Amazon.com, Inc. (NASDAQ:AMZN) has been a Wall Street darling for many years, with very few interruptions. And for years, the company has defied conventional valuations, sporting a triple-digit P/E for much of its publicly traded life.
Amazon bulls have long argued that the high valuation is worth it because of the extremely long game (that Amazon will take over everything), but they have newer ammunition — actual profits, thanks in large part to the success of its high-margin Amazon Web Services cloud service.
Companies with strong earnings growth projections do deserve to trade at a premium to stocks with stagnant growth. But let’s dig a little deeper.
Amazon is projected to grow earnings at an impressive 36% annual clip over the next five years. But even if AMZN stock doesn’t move for five years and it hits its growth projections, the stock still would be trading at nearly 40 times earnings by 2022. Unless the broader market changed drastically from a P/E that typically resides between the high teens and mid-20s, that still would be considered overpriced.
And again, that’s assuming a bad-case scenario of zero overall return on AMZN stock amid a great-case scenario of matching that 36% annual earnings growth.
Amazon is a great company. But it’s a stretch to think Amazon can continue trading at these kinds of valuations forever. That makes AMZN a potential earnings calamity every three months.
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Tech Stocks to Sell: Salesforce.com (CRM)
Trailing 12-Month P/E: 255
Forward P/E: 58
Next Earnings Report: Feb. 22
Salesforce.com, inc. (NYSE:CRM) is…
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