February 22, 2021 BARRON’S 33
TECH TRADER
There are now dozens of stocks trading above 35
times 2021 sales estimates.That doesn’t leave
much room for error.
Tech Valuations Are
Getting Scary. Here’s
How We Know.
I
t might be time to start wor-
rying about tech-stock valua-
tions. A standard issue ana-
lyst note set off my alarm: On
Wednesday, Goldman Sachs
upgraded Palantir Technolo-
gies from Hold to Buy, while
more than doubling its price target on
the stock to $34.
It’s not that I’m concerned about
Palantir’s business; I see real value in
the company’s big-data analytics plat-
form. But Goldman’s report captured
the market’s current philosophy
around valuation, which is basically to
ignore it.
The investment bank argues that
Palantir(ticker: PLTR) deserves to
trade in line with other fast-growing
companies. And Goldman points out
that companies growing revenue at
better than 30% a year currently trade
at 44 times estimated 2021 sales. That
multiple gets you to a $34 price on
Palantir shares. Keep in mind that last
September the stock opened for trad-
ing at just $10 after its direct listing on
the New York Stock Exchange.
Reading Goldman’s note, I broke
into a cold sweat. The valuation strat-
egy fails to address an obvious ques-
tion: Should software stocks, or any
stocks for that matter, trade at 44
times forward sales? As a point of
reference, the Nasdaq-100 index
fetches just five times 2021 sales.
Using FactSet’s screening tools,
and broadening the window a little, I
found dozens of stocks trading at
more than 35 times sales estimates
for calendar 2021. The list on this
page shows the highlights, including
many of 2020s biggest winners:
Snowflake,C3.ai,Zoom Video
Communications,Fiverr,Shopify,
andCloudflare.
I’m not the only one starting to
have reservations about the lofty mul-
tiples. The market’s reaction to tech
earnings suggest that the doubts are
mounting.
Zoom Video (ZM) is down 12%
since reporting October-quarter earn-
ings on Dec. 1, and it’s off 30% from
its all-time high. It still trades for 36
times forward sales. Investors are
worried that growth will ebb when
the pandemic fades and people spend
less time on video calls, but I’m not
sure they’re worried enough.
Shopify (SHOP) has been an as-
tonishing pandemic success story,
and I’ve been too bearish. The e-com-
merce software company last week
posted 94% revenue growth in the
December quarter, as small busi-
nesses rushed to set up online store-
fronts. But Shopify also said top-line
growth will moderate in 2020 as the
pandemic winds down.
Heading into the earnings report,
Shopify shares had rallied almost 30%
year to date, more than tripling since
the end of 2019. Last week, though,
investors ignored the earnings beat,
and the stock drifted 2% lower. With
shares trading at 44 times sales, the
valuation still seems strained. If you
valuedAmazon.com’s (AMZN) reve-
nue at the same forward sales multi-
ple, the company would be worth over
$20 trillion.
Fiverr (FVRR), which operates an
online marketplace for free-lancers,
posted fourth-quarter sales of $56.7
million, up 89%, and it projects 2021
sales of $280 million, up 48%. Fiverr
shares stillsagged onthe news—and
why not?
Fiverr has rallied 1,200% since the
end of 2019 and 57% year to date.
Strangely, some of the recent surge
seems tied to the company’s decision
to pony up for a Super Bowl ad. Fiverr
has rallied more than 30% since un-
veiling plans for the ad in mid-Janu-
ary, boosting its market cap by $2.6
billion. The ad spot cost Fiverr $8 mil-
lion. (Ask Pets.com how its January
2000 Super Bowl ad worked out.)
Many of these tech stocks are so
expensive that even significant selloffs
haven’t done much to check their val-
uations.
Snowflake (SNOW), the cloud-
based data-warehousing software
company, trades for nearly 80 times
estimated sales for the 2021 calendar
year, and that’s with the stock down
32% from its December high of $429.
At a current price around $300, the
stock is still nearly triple its $120 ini-
tial public offering price just last Sep-
tember. The company reports earn-
ings on March 3.
And that brings me back to Palan-
tir. The stock jumped 15% Friday, to
$29, but that’s only after a six-day los-
ing streak in which it lost 35%, despite
the Goldman upgrade.
The company’s latest earnings re-
port showed strong demand from gov-
ernment clients, but disappointing
commercial growth. Meanwhile, a
post-listing lockup expiration allowed
many employees and early investors to
sell their shares—not a terrible idea
given how much the stock has moved.
I
n November, Ilaid out a bullish
case forMicron Technology
(MU). As I noted then, there’s
growing demand for the com-
pany’s memory chips for cars, cloud
computing, 5G phones, and PCs. I
wrote that the stock could double
over time. It’s already rallied 57%, to
a recent $91. Last week, Citi analyst
Christopher Danely wrote that with
memory supplies tightening and
prices rising, profits should explode,
from an estimated $3.62 a share in
the August 2021 fiscal year, to $10.64
in fiscal 2022, and $15.83 in fiscal
2023. And the stock? He thinks it
could hit $150.
I’ve also been consistently bullish
onSoftBank(SFTBY)—both in this
column and elsewhere inBarron’s—
and over time it’s proven to be the
right call. There were some dark mo-
ments last spring when the stock got
cut in half. But a combination of asset
sales, buybacks,and improved perfor-
mance for the $100 billion SoftBank
Vision Fund has turned things
around. Now the Vision Fund is
poised for its biggest exit yet.
Coupang, a Korean e-commerce
giant, has filed for a U.S. IPO. Soft-
Bank owns 37% of the company. With
revenue comparable toeBay(EBAY)
but growing 90%, count on a lofty
valuation. SoftBank’s stake could be
worth $20 billion or more.
Last week, SoftBank shares set a
new high, quadrupling from the
March lows. With a portfolio full of
IPO candidates, the stock could keep
rising.B
By Eric J. Savitz
The Priciest Tech
Cloud, fintech, and AI companies top the
listofthemostexpensivetechstocks.
Price to
Company/Ticker 2021E Sales
Lemonade/ LMND 81.9
Snowflake/SNOW 78.1
Bill.com Holdings/BILL 60.2
C3.ai/AI 59.2
CrowdStrike Holdings/CRWD 44.8
Appian/ APPN 44.4
Shopify/ SHOP 43.6
Zscaler/ZS 43.2
Cloudflare/NET 43.1
Coupa Software/COUP 40.9
Fiverr International/FVRR 39.5
Trade Desk/TDD 36.4
ZoomInfo Technologies/ ZI 35.7
Zoom Video Comms/ ZM 35.6
Okta/ OKTA 35.2
E=Estimate. Source: FactSet