Many of your stocks followed here have very impressive P/S ratios…are you holding potential timebombs?
I have been looking over several stocks recently from the perspective of how they might perform if the numerous companies that are guiding lower revenue for 2019 actually materializes…that is, if this were to be a larger swath tech industry trend (potentially over-built tech sectors, etc.) how might the higher P/S stocks behave from a return probability perspective.
Many of these “nosebleed” stocks can have rather violent stock movements with any suggestion of lowered guidance because so much growth is already priced in. I am going to set up a couple hypothetical portfolios of NPI type stocks (NPI, Bert, Gary, Saul, etc.) with the only criteria separating them being a high P/S (perhaps those above 10 and below 10 although I may choose below 10, 10-15 and above 15).
The theory goes that the higher P/S stocks will underperform lower P/S stocks. What is this based on?
There are numerous studies that suggest the highest P/S stocks will perform the worst in future years. Here is one example:
You can see that stocks in the highest quintile of P/S are usually the worst investment performers.
One of the very few stocks that I have seen maintain a very high P/S is FB (now at 12 with recent drop)…not even GOOG or AAPL has had such nosebleed levels. Some here have argued that SHOP is the equivalent of the FB anomaly but IMO, this contorted logic is what gets people in trouble…arguing by exception.
Tinker has argued to stay invested in stocks with growing revenue irrespective of them being high valuations and that lower valuations stocks are low for a reason…there is some sound logic in that assertion. I have argued that there is often a huge disconnect between a technology adoption lifecycle and the accumulation of the stock…something I have coined the TALC/SALC disconnect…and that stocks can sometimes get way ahead of themselves. These two viewpoints are NOT mutually exclusive.
There are numerous examples in recent past of similar extreme high P/S stocks like LNKD and TWTR that dropped precipitously. If you contemplate similar asset class historical records, one needn’t go much further than to the 2000 bubble when tech stocks like MSFT traded at P/S of 35 and CSCO traded at 37! We are not there yet.
The FOOL also had an article here with some historical context as well:
When investors pay an irrational P/S ratio, they pay for irrational growth. When investors buy stocks with high P/S ratios, those stocks need to grow revenue at least 30%-40% on a yearly basis for many years into the future. This is because investors are paying a big premium today for growth that is expected to happen in the future. But, with any deviation from future growth expectations, the premium paid today may no longer be deserved. As a result, and because an irrationally high P/S ratio cannot be maintained by an increase in revenue growth, the stock is likely to collapse.
I made a similar argument with SHOP back in Oct 2017 when the P/S was well above 20 and the stock traded at 116…now up around 6% since then…though I know many of you bought it again at even lower values when Citron did their “magic”.
But let’s look at a few of your/our favorites:
NVDA P/S 14
AYX P/S 17
SHOP P/S 20
TEAM P/S 19
VEEV P/S 15
NKTR P/S 47
OKTA P/S 17
ALGN P/S 14
ZS P/S 21
MDB P/S 12
ANET P/S 12
TDOC P/S 11
SPLK P/S 12
GWRE P/S 12
TWLO P/S 10
ZEN P/S 12
HUBS P/S 12
ZUO P/S 12
SQ P/S 6
AAXN P/S 7
AMZN P/S 4
NTNX P/S 9
TTD P/S 7
CLDR P/S 6
PSTG P/S 5
TLND P/S 9
CELG P/S 5
YEXT P/S 6
I fully recognize there are various “qualifications” like drugs stocks, growth rates and forward P/S’s, etc. But those arguments for another day.
I am just doing a fun compare and contrast between tech driven stocks that might show up in NPI type investing to track an equal weighted portfolio based on valuations. I will report results from time to time.
Anyone care to add other tech stocks you think have the greatest promise of all?