Technology stocks in the United States have received a beating following a poor financial outlook from LinkedIn. Yet with sector valuations now averaging 4.2x Revenues, 30.6x FCF, and 56.1x EBIT, there’s still plenty of room for decline.
Alex Cutulenco | Ubika Research Analyst | February 12, 2016: The United States is known for its strong financial markets, access to innovative centers, and access to capital. Technology is currently the industry of focus, and is one of the most highly-funded sectors in America. Unfortunately, tech stocks have received a beating following a poor financial outlook from LinkedIn (NYSE: LNKD). Its share price is now down from the $250 level seen in Nov ’15, to current $100: an astounding 60% sword to the hearts of its shareholders.
Tech valuations are now averaging 4.2x Revenues, 30.6x FCF, and 56.1x EBIT. Although the valuations have largely come down, they are still eye-popping to look at – especially in comparison with its Canadian counterparts.
Figure 1: Public Tech Stock Valuations
Source: Thomson Reuters (02/11/2016)
It also doesn’t help that the S&P 500 is now down 8% YTD, fueled by worrisome remarks from Fed Chair Janet Yellen. Yesterday, she stated: “There is always some chance of recession in any year,” sending the price of gold up $100 to $1250/oz. during the past two days.
She was also questioned about reversing the interest rate hike decisions and sending them into negative territory. If that were to happen, then banks would need to pay interest on excess reserves at the Fed. U.S. banks currently have $2.27 trillion in reserves at the Fed, compared to the $117.3 billion required.
With other tech firms expected to release earnings soon (such as HP on 24/02, Fitbit on the 22/02, and Oracle on 15/03), we expect that valuations have much more room to decline. Investors beware.
Alex can be reach at: alex@gravitasfinancial.com
Read more analyst insights from Alex Cutulenco
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