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Tech Stocks Are Dumped By Goldman Sachs With No Reason
12 june 2017

All you need to know about the selloff happened on Friday - Goldman released their special report where they compared FAAMG stocks performance with dot-com bubbled of 1Q00. FAAMG stands for Facebook, Apple, Amazon, Microsoft and Google which indicates that previous acronym, FANG, is outdated. Netflix isn't in the list because of relatively small market capitalization (or because Goldman 'loves' them?). 

This exhibit below should show us how overpriced tech companies are at the moment. But does it really say so? Take a look at the numbers: 

SPX weight is almost the same which eventually means nothing, it's based on the companies Goldman chose to analyze. Moreover this is the main reason why Netflix is out of the list. SPX depends on high-tech stocks, but in my opinion tech stocks nowadays drive the whole market and the best example of that is Amazon. Amazon is entering new markets each month: delivery, smart homes, prescription drugs, bookstores and many others. Amazon is not an e-commerce stocks, Amazon's AWS is number one cloud infrastructure provider in the market right now. Google goes into various different markets either - driverless cars, AR/VR, smart homes and even smart phones. So in terms of the business, tech companies have a wide exposure and their business is diversified.

P/E valuation is three times less than it was in 2000x - another proof that the current market is cautious as it has never been. Cash balance is another important factor. However, let's check the Apple's cash balance as of 1Q17:

So Goldman in it's calculation missed one important fact - Apple has a huge amount of cash. Goldman's analysts take into account only cash and cash equivalents and ST marketable securities, while they miss a huge portion of long-term marketable securities which is also very important. Out of my curiosity, I decided to check whether any of the companies from the dot-com bubble had that much cash even in LT securities. As far as Microsoft has much more cash than any company that time, I look up for their 10Q statement as of 1Q00 and here their balance:


Do you see any long-term securities on the balance? No and this factor as definitely positive for FAAMG companies nowadays due to a high level of margin of safety. As we see, Cash / EV has improved significantly since 2000.

FCF margin is also a very important thing, especially for tech companies, but this one has also improved. Also taking into account how fast the margins are growing for Facebook and Amazon, I wouldn't be surprised if in a few quarters from now the difference between 2000 and 2017 will be even larger. 

Gross Profits / Total Assets

I would like to pay special attention to this ratio. When we take into account the cost of hardware in 2000 and current cost of hardware - we'll see that there's a huge gap between them. There're no doubts that the whole tech infrastructure has improved significantly. Can we rely on this ratio to compare those companies? To answer this question, let's check the GP/TA ratio of one of the companies from FAAMG list. Let's take Google as an example. 

According to the company's 10-Q 3Q'06 report, gross profit for three months was about $4.46B. At the same time, the size of total assets was equal to $15.69B. The same metrics for 3Q'10 were the following: gross profit at $13.41B, total assets at $53.34B (Google's 10-Q report). As according to the above-mentioned data, you can see that this ratio has been around 25-28% for quite a while. 

GP/TA is growing because the companies are efficiently using the resources they have: Google and Facebook have literally created the advertising industry, context, native, video and all other types. Their algorithms allow them to increase the margins, at the same time those algorithms might be harmful as well. We all remember this scandal around Google's YouTube advertising and this is how the market gets regulated nowadays. Goldman Sachs is missing one important thing - the market has changed significantly and you cannot just extrapolate the numbers from 2001 year to 2017 without making any assumptions on the Internet penetration, ad market changes, software's market shift to the cloud, people's consumption preferences - this list is obviously endless. 

Also there is one more ratio in the table - ROIC - return on investment capital. Let me remind you how this ratio is calculated: we take company's net income, subtract dividends amount and divide it by total capital. As we all know, Facebook has reported its first net income a few quarters ago, so did Amazon. Google, Apple and Microsoft have been profitable for years. But does that mean that we have a bubble here? As far as the market is cyclical, especially the tech one - any extraordinary event can lower the margins or top-line revenue. One of the examples is YouTube's most recent scandal around the advertising. As soon as an algorithm proves being wrong / harmful / slow - it will affect the company's financials. 

This is a highly competitive market where niche solutions come up and down each day while most of them are far from the profitability. Companies like Apple or Amazon are taking over those niches as soon as they see an opportunity, but is it a bad sign for the company and its investors in long-term? I guess, no. I think ROIC is more or less stable ratio especially for the companies with long history of positive net income. 

Tech companies are dumped with no reason

Goldman Sachs caused a huge selloff on Friday comparing today's tech companies valuation to the dot-com crisis happened 16 years ago. Basically comparing those numbers means nothing when you don't take into account the market's shift and change of whole ecosystem. The worst thing is that people are going to follow big banks and analysts whatever they say - that's why I'd recommend tech investors to keep calm and as soon as we see the sign of recovery - take the undervalued shares from the market. 

You can agree or disagree with the following statement by clicking the relevant button below. 

Disclosure: I bought shares of PYPL, QCOM and INTC during the Friday's selloff and I own the shares of a few other tech companies, including SQ, ETSY, TWTR, LC, AMD and others.

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Tech Stocks Are Dumped By Goldman Sachs With No Reason

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Forecast came true

AMZN and FB are up since this post, MSFT AAPL and GOOG are slightly down, Google is mostly down because of their fine in Europe - of course, it's too early to say that Goldman was wrong about the tech stocks, but locally, at the current time frame, I think there is no reason to compare current market to dotcom bubble