NEWS

Why investors are paying huge premiums for enormous tech companies

That stock price rally comes despite an already high valuation multiple, which appears to price in some very lofty expectations for growth.

Why the surge?

Nvidia continues to prove it’s the company of the future. The technology powerhouse, which was named Yahoo Finance’s 2016 company of the year, powers Google searches, Amazon’s Alexa digital assistant, Tesla’s self-driving cars and Netflix’s movie recommendations. And it’s become a dominant force in the continued shift toward artificial intelligence.

The excitement over this company’s prospects can be seen across tech, including the big-cap tech.

The impressive 19% gain for the S&P 500 (^GSPC) over the last year is eclipsed by the 32% surge in the Nasdaq 100 (^NDX). Importantly, the source of the Nasdaq’s outperformance are the major tech stocks, including Apple (AAPL) , Alphabet (GOOGL) , Microsoft (MSFT), Amazon (AMZN) and Facebook (FB), which make up 42% of the Nasdaq 100 versus 13% of the S&P.And much of the upward movement of these names may not even incorporate optimism around long-term opportunities where monetization remains elusive.

Amazon

At an incredibly high 81x forward P/E, Amazon has not been trading on traditional metrics for some time.But Needham analyst Kerry Rice said the high price doesn’t even incorporate long-term bets at this point.“A lot of investors are counting on that at some point Amazon flips the switch on profitability where they pull back on investing and you get a hockey stick trajectory of profitability,” Rice said. In other words, because the company could eventually become significantly more profitable, its P/E multiple is only temporarily elevated.The $450 billion company has continued to soar on progress in its core business, with its first quarter report merely the latest sign of dominance. Its stock is up almost 1,300% in the last ten years.Last quarter, revenue of $35.7 billion topped analyst estimates, and the key focus remains the near-term market opportunity.With about 100 million monthly unique visitors and about $1 out of every $3 spent online, analysts say there is still considerable upside in the core e-commerce business (with still only 10% of retail today). And growth in Amazon Web Services (AWS) is boosting profitability.

Bezos’ longer-term vision isn’t even baked in to the company’s seemingly high multiple, according to analysts.The company has several multi-billion dollar opportunities, according to Rice, including video, advertising, groceries, and home services.In his most recent shareholder letter, Bezos highlighted that Amazon remains a “Day 1 company,” just at the beginning of its potential.“The outside world can push you into Day 2 if you won’t or can’t embrace powerful trends quickly,” Bezos wrote. “If you fight them, you’re probably fighting the future. Embrace them and you have a tailwind.”Long-term projects like autonomous Prime Air delivery drones could lead to more upside, but in the meantime Bezos has focused on near-term practical applications of technology, which is really what is driving the stock, according to analysts.

 

 

 

Bezos’ longer-term vision isn’t even baked in to the company’s seemingly high multiple, according to analysts.

The company has several multi-billion dollar opportunities, according to Rice, including video, advertising, groceries, and home services.

In his most recent shareholder letter, Bezos highlighted that Amazon remains a “Day 1 company,” just at the beginning of its potential.

“The outside world can push you into Day 2 if you won’t or can’t embrace powerful trends quickly,” Bezos wrote. “If you fight them, you’re probably fighting the future. Embrace them and you have a tailwind.”

Long-term projects like autonomous Prime Air delivery drones could lead to more upside, but in the meantime Bezos has focused on near-term practical applications of technology, which is really what is driving the stock, according to analysts.

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