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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Let’s say Widget Corp shares are being valued at 10 times annual widgets. If in the future demand for widgets goes up then so might the shares, because more widgets times 10 is a bigger number. But if demand for widgets goes down then so might the shares because it’ll be 10 times fewer widgets. This is the kind of insight you can receive as a client of Goldman Sachs.
Goldman’s US markets kickstart this week is on the theme of the Magnificent Seven, six of whom have reported calendar fourth-quarter 2023 earnings. And in spite of its Tesla handicap (down 27 per cent year-to-date on a miss, a vague warning and a wayward CEO) the Mag7 has continued to outgrow the S&P 493:
“Investors often ask us whether the group’s 30x P/E multiple is sustainable given rest of the index trades at 18x,” write Goldman’s David Kostin and team. Yes! he replies, because widgets:
The premium valuation reflects investor expectations the ‘Mag 7’ will post 3-year CAGR sales growth of 12% vs. 3% for the S&P 493. As the Dot Com boom showed, continued outperformance requires stocks to exceed the high bar set by consensus. Although growth expectations are high, if estimates are realized and valuation remains unchanged, the group will outperform.
Nvidia’s numbers are due on February 21. If it meets consensus then the Mag7 will have delivered sales CAGR of 14 per cent this year, versus just 2 per cent growth for the rest of the S&P, Goldman says. (This remains true irrespective of Nvidia, incidentally, since per the below chart the average quoted seems to be median not mean, but fine.)
No matter how it’s calculated, an expected three-year sales CAGR of 12 per cent is slower than a 2023 sales CAGR of 14 per cent. Bottom-up forecasts stay too high for too long whenever sales growth deteriorates, so a 30x forward PE might look a bit rich for some.
To those people, Goldman says widgets:
Assuming (1) no change in the current P/E multiple of the group (30x) and (2) consensus estimates for 2025 remain unchanged, then the Magnificent 7 would appreciate by 16% through year-end. However, if consensus 2025 earnings for the group follow their typical path of negative revisions experienced during the last 10 years (-6%), the group would return 9%. This return would exceed the 4% return we forecast for the S&P 500 index (to our 5100 target) and the resulting 1% implied return for the remaining 493 stocks.
Meaning 30x isn’t that expensive:
It’s certainly cheaper than the dotcom era . . . famous five? . . . when everyone was getting excited about oil-powered internet routers bought on unsecured credit or whatever:
And also . . . .
One significant difference between the Magnificent 7 and the Tech Bubble 5 is their penchant to re-invest for growth. The Mag 7 re-invests 60% of their cash flow from operations through growth capex and R&D. This reinvestment rate is more than double the 26% of the Tech Bubble 5 and about 3x that of the S&P 493.
OK, maybe we’re being overly snide. There’s more in the research than this facetious summary might suggest. But since Goldman has put the full note in front of its client paywall, and since following Goldman is likely to be a more profitable bubble-times strategy than listening to us, you may as well read it all at source.
Further reading:
— Those trying to pick AI winners should remember the dotcom days (FT, 2023)
— ‘Tech wreck’ looks more like another dotcom bubble bursting (FT, 2022)
— Pandemic tech bubbles echo those of the dotcom era (FT, 2021)
— US stock rally drives ‘ludicrous index’ towards dotcom era heights (FT, 2021)
— Wall Street IPO bonanza stirs uneasy memories of 90s dotcom mania (FT, 2020)
— Dotcom redux as Shopify extends explosive share spike (FT, 2020)
— ’I’m having a dotcom deja-vu moment’ (FT, 2019)
— Blockchain fervour evokes memories of dotcom bubble (FT, 2017)
— Dotcom history is not yet repeating itself, but it is starting to rhyme (FT, 2015)
— Etc.
Read the full article here