While the tech market is on an upswing, with tech stocks soaring 25% this year, some names stand out as surprisingly affordable given their historical valuations.
The Nasdaq Composite Index’s forward price-to-earnings ratio has climbed from 23.3 to 27.5 since March. Normally, tech companies have higher P/E ratios, yet a few intriguing options flaunt forward P/Es significantly below their 10-year averages. In fact, some large-cap stocks are trading anywhere from 40% to 70% lower than their historical valuations.
Take Amazon, for instance, along with Nvidia and Netflix. These stocks highlight how their growing earnings have outpaced share price growth, resulting in a surprising dip in their relative costs compared to their past values.
Amazon
It’s quite remarkable, really, that Amazon has been around long enough to become a household name. Starting out as an online bookstore in 1997, it has evolved into a colossal force in e-commerce, boasting a market cap of about $2.4 trillion.
But Amazon is much more than just retail. Its Amazon Web Services (AWS) leads the world in cloud computing, holding a 30% market share. It generates a staggering $10.16 billion in profits for Amazon’s second quarter alone, surpassing the entire e-commerce division’s contributions.
Interestingly, at one point, Amazon’s P/E ratio reached an astounding 147.6 over the last decade. Now, it trades at a forward P/E of 34.1, which, while higher than that of the Nasdaq, is still a substantial discount compared to its historical standards.
Nvidia
Then there’s Nvidia, a significant player in the tech space, even surpassing Amazon in market value with over $5 trillion. The company’s success is largely due to its dominance in the GPU market, essential for advanced computing, including AI applications. Nvidia controls a staggering 90% of the data center GPU market.
As a result, its annual revenue has skyrocketed by 682% over the last five years, with net income soaring by 1,580%. Currently, Nvidia’s P/E stands at 42.2x, significantly lower than its 10-year average of 60.3x, which suggests that barring any major shifts, it’s a relatively attractive option right now.
Netflix
Much like Amazon’s early days, Netflix started out by mailing DVDs to customers. This disrupted traditional rental stores but laid the groundwork for what has become the world’s largest streaming service, now boasting over 300 million subscribers. Their recent quarter reflected $11.5 billion in sales, up 17% from last year, with a net income of $2.5 billion.
Netflix, too, has seen sky-high valuations in the past, but its current forward P/E of 43.3 seems quite appealing against its 10-year average of 123.5.
Cheap is a relative term.
Of course, none of these tech stocks seem cheap when set against traditional sectors. For example, Ford Motor Company has an expected P/E of 12.8, while General Motors dips even lower to 6.8. However, those automakers don’t come with the same growth potential that tech can offer, at least not for now. So, when you evaluate stock options within tech, comparing a company’s valuation to its own 10-year average can reveal some real bargains, particularly when it comes to Amazon, Nvidia, and Netflix.
