You can add venture-capital star Bill Gurley, a general partner at Benchmark, to the list of those who think technology companies are overvalued.
“An entire generation of entrepreneurs & tech investors built their entire perspectives on valuations during the second half of a 13-year amazing bull run,” he tweeted.
“The ‘unlearning’ process could be painful, surprising and & unsettling to many. I anticipate denial.”
Recent declines by technology companies haven’t suddenly made them a bargain, Gurley says. The tech-heavy Nasdaq Composite has slid 22% so far this year and has dropped 23% from its record close in November.
“Previous ‘all-time’ highs are completely irrelevant,” Gurley said. “It’s not ‘cheap’ because it is down 70%. Forget those prices happened.”
He’s not too impressed with valuations. “Valuation multiples are always a hack proxy. Dangerous to use,” Gurley said.
“If you insist, 10X should be considered AMAZING and an upper limit. Over that silly.” Perhaps he means 10 times sales.
Gurley says valuation metrics may turn unfriendly toward tech companies. “You may be shocked to learn that people want to value your company on [free cash flow] and earnings,” he said. Facebook trades at 14X [earnings] & is growing 23%. What earnings multiples are you assuming?”
It’s the “QUALITY” of revenue and earnings that matter, Gurley said.
He has a receptive audience in Amazon (AMZN) - Get Amazon.com Inc. Report Founder and Executive Chairman Jeff Bezos. “Bill is without doubt one of the smartest people I know and always worth listening to,” Bezos tweeted.
“Most people dramatically underestimate the remarkableness of this bull run. Such things are unstoppable, until they aren’t. Markets teach. The lessons can be painful.”
Bezos should know. Amazon stock has tumbled 17% since April 28 on a weak earnings report. He lost $21 billion in 24 hours.
Worries about rising interest rates have hit tech stocks hard. That’s because many tech companies aren’t expected to generate strong earnings until far in the future. So rising rates make the income from bonds, which are safer investments, more appealing for the present.
Bond yields have soared recently, with the 10-year Treasury gaining 1.49 percentage points so far this year to 3%.
Meanwhile the Federal Reserve began raising rates in March, by 0.25 percentage point. And many experts expect the Fed to increase rates by at least half a point in both May and June.
But not everyone has given up on tech stocks. Morningstar cites four of them that it sees as substantially undervalued and deserving of a wide moat rating: