Apple, Netflix to Amazon, Earnings Math Catches Up With the Tech Highflyers

tech.hindustantimes.com:

Who could have foreseen the selloff in shares of big technology companies? Anyone who bothered to do a little math.

Technology shares are taking a historic beating. The average tech stock in the Russell 3000 Index is down 44% from its 52-week high, and many are down much more. Of the roughly 400 stocks in the sector, about a quarter are down more than 60%, most of them smaller companies. Big tech hasn’t held up much better, though. Amazon.com Inc. is down 43% from its 52-week high. Netflix Inc. is down 73%.

The collapse of overhyped tech startups may not be surprising, but surely investors couldn’t have anticipated that the tech powerhouses would receive similar treatment.

Or could they? When shares of Amazon began to buckle last July, they traded at more than 40 times Amazon’s expected earnings for the current fiscal year. That’s high even for a growth stock. The forward price-earnings ratio for the Russell 1000 Growth Index has averaged around 20 since 1995, the longest period for which numbers are available. (The average for the Russell 3000 Growth Index is the roughly the same, but the data set is shorter, back to 2006.)

Either Amazon investors were content to pay more than double the historical average for a growth stock or, more likely, they expected future growth to justify the company’s outsized valuation. One way to gauge those expectations is to calculate the earnings implied by the stock price at a 20 multiple, the long-term average for growth stocks. By that measure, investors’ expectations were ludicrous. To justify its 52-week high last July at a 20 multiple of forward earnings, Amazon would have to deliver profits of $187 a share. That’s a long way from the $17 a share analysts expect Amazon to achieve this