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Top shelf prices don’t mean tech stocks are out of reach

Top shelf prices don’t mean tech stocks are out of reach

10 May 2019

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Facebook, Amazon, Apple, Netflix and Google owner Alphabet. The FAANG stocks.

Rapid revenue and profit growth means glossy, fast growing tech stocks have clear attractions. But after a strong run these last few years, the lofty share prices might leave potential investors thinking they’ve missed the boat.

We don’t think that’s necessarily right.

This article isn't personal advice. All investments and any income from them can fall as well as rise in value so you could get back less than you invest. If you're not sure if an investment is right for you please seek advice.

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P/E ratios have been falling

Just because a company’s shares have risen or fallen doesn’t mean the stock has become expensive or cheap. Remember, price is what you pay, but value is what you get.

In our analysis, we often use a price to earnings (P/E) ratio, which you can find on a company’s factsheet on our website.

By comparing a company’s price and earnings, investors can get an idea of a share’s relative valuation. Relative to itself, a lower P/E ratio for a company can be a good sign for investors. That’s because, all things being equal it implies the shares are better value.

Price to earnings ratios for some of the FAANG names are notably lower than where they’ve been.

Read more about technology stocks

What’s behind the lower P/Es?

You’d expect prices and earnings to move together. As a company gets more profitable, the share price should rise. But that’s not always the case.

For example, shares in Amazon are 500% up on where they were 5 years ago. But profits have gone up even faster.

The fact profits have risen so rapidly has chopped the P/E ratio (using expected earnings) from 112 to 61. That arguably makes the company’s valuation less demanding now, despite the price being 6 times as high!

We should point out that as companies mature, growth rates are usually expected to slow down, which is a contributing factor to the lower P/Es. And as ever, past performance is not a guide to the future.

While it could still grow quickly, and it’s beaten expectations recently, Amazon’s current valuation remains well ahead of the market average. That puts the pressure on them to increase profits in the future.

Amazon P/E vs Share Price

Past performance is not a guide to the future. Source: Thomson Reuters to 25/04/19

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This article isn't personal advice. All investments and any income from them can fall as well as rise in value so you could get back less than you invest. If you're not sure if an investment is right for you please seek advice.

Another example

Up until 2017 Facebook’s P/E had been falling in exactly the same way. The price was rising, but profits were rising faster still.

Facebook earns its money by charging fees to advertisers. As the user base has grown over time, so has the attraction of the ad space. That fuelled the 414% rise in profit between 2014 and 2018.

Despite some hurdles like the Cambridge Analytica scandal causing some moderations of future growth forecasts, Facebook has continued to increase profit. That led the P/E ratio to bottom out at just 16.7 before sentiment improved on the back of reassuring updates earlier this year. It now sits at 24.3.

Facebook P/E vs Share Price

Past performance is not a guide to the future. Source: Thomson Reuters to 25/04/19

The challenge for Zuckerberg & co is to improve the offering and battered privacy record.

Find out more about the group’s strategy and see our latest view

Of course, a lower P/E doesn’t always make for a strong investment case, and shares can go down as well as up, so as with all investments there’s a chance you could get back less than you invest.

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What's a PE ratio?

A P/E ratio reflects how much investors are willing to pay per £1 of a company’s profit. It’s calculated by dividing a share price by a company’s earnings.

If a company has a P/E ratio of 20, it means investors are paying £20 for every £1 of profit it makes. If the share price doubles, but earnings stay the same, the P/E would be 40.

Therefore a lower PE is typically more attractive, but investors should consider more than just one indicative ratio.


Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Investment notes
No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

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