Let's all calm down

Let's all calm down
Photo by Fabian Møller / Unsplash

Once a narrative takes off, it's hard to assess facts with a clear-eyed focus. The story right now is that the market is heading for disaster. Dot-bomb 2.0 is going to happen soon.

To be sure, it already has. Definitely, it can fall further. At the same time, nobody knows where the bottom is – and if you think you know, good luck shorting the market.

A metric for value

But let's take a sober look at where valuations are regarding current tech stocks. The most common way of measuring this is to look at what's known as the P/E ratio. This is a comparison of a share's price to its earnings per share (EPS).

For example, if price of an individual share is $75 and its EPS is $4, then the P/E ratio is 18.75. A few folks will insist that growth rate should be factored into valuations but since this is a season of correction, P/E will suffice for this moment.

Generally, I personally believe a fair P/E ratio for a mature company is between 5-20. Anything beyond that is a sign that the stock market in general is overvalued. Going by that metric, let's look at where we're at with Big Tech.

Netflix

Netflix

P/E Ratio: 16.93

I've already written about Netflix. Certain folks think they're dead. I'm of the opinion that, while they're facing an uphill battle, a few strategic decisions could make them a contender again. They can fall further. However, my current opinion is that their valuation is now sane.

Meta

Meta

P/E Ratio: 15.14

There's no company I hate more than Meta. It's my opinion that they're dying. Yet, I believe their failure isn't imminent – and that it may take a solid 10 years before they finally kick the bucket. To that end, I believe their current valuation is fair – but will probably go lower.

Verizon

Verizon

P/E Ratio: 9.54

If you want a safe bet, here it is. Verizon offers good stable earnings and a dividend yield at 5.13%. They are the #1 telecom company in the USA, while also owning solid Internet brands such as AOL and Yahoo. With a market cap of 206B, they're not going anywhere.

Apple

Apple

P/E Ratio: 23.72

Even the biggest company by valuation is coming down to earth. For the past 25 years, betting against Apple has been the exercise of fools – and the stuff of legendary memes. Yet as Apple's stock drops along with the rest of the market, it is falling ever closer to a valuation of under P/E ratio of 20.

Alphabet

Alphabet

P/E Ratio: 20.76

Most famous for the Google search engine, this company is the inspiration for this blog post. As Alphabet's stock price has fallen over the past 6 months, it's moving incredibly close to a below-20 P/E ratio. When you consider Alphabet's crazy revenue growth over the past four years, its stock price could soon be a bargain.

What happens next?

Like I said, the market may fall further. Or, as the saying goes, "the market can be irrational for longer than you can remain solvent." We may have not bottomed out yet – especially while the Fed still plans to raise interest rates.

However, it's also generally a bad idea to bet against the tech industry. While the dot-bomb of 2000 set the industry back by a decade, the notion that the Internet would deliver be a game changer proved true. At that early stage, we just didn't know how.

We're seeing this again today. Several technologies such as crypto, the Metaverse, and the Fediverse have yet to reach critical mass. Eventually the dust will settle.

In the meantime, most mainstream tech companies – with proven track records – are not tremendously overvalued. The market is fast returning to sanity.