Deep Dive: Netflix and Twitter are on a list of tech stocks that have gotten cheaper in the past year

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Technology stocks have had an amazing ride. But some, including Netflix and Twitter, are less expensive relative to earnings estimates than they were a year ago.

You are no doubt aware that 2019 was an excellent year for U.S. stocks. Still, a breakdown of the 11 sectors of the S&P 500 Index SPX, +0.67%  might raise an eyebrow:

The information technology sector led by a mile.

Regarding the broader market, Goldman Sachs analysts led by David Kostin wrote in their Weekly Kickstart report Jan. 3: “Valuation expansion accounted for 92% of the appreciation” of the S&P 500 during 2019. That simply means that investors were willing to pay more for stocks, because earnings growth didn’t drive prices.

S&P Global Market Intelligence estimates that weighted aggregate earnings per share for the S&P 500 increased only 0.01% last year.

The Goldman analysts expect S&P 500 earnings per share (EPS) to increase 6% in 2020, driving a modest 5% gain for the benchmark index. Click here for more about that report and a basket of dividend stocks the analysts listed.

Big increase in tech valuation

Here’s a 15-year chart showing rolling 12-month forward price-to-earnings ratios for the S&P 500 information technology sector and the broader S&P 500:

FactSet

The forward P/E valuation for the S&P 500 technology sector has never been higher over the past 15 years.

The tech sector is trading for about 22 times forward earnings estimates, up from 15.7 a year ago. For the broader S&P 500, the current valuation was exceeded only briefly, early in 2018.

Then again, we cannot say the current valuation levels are anywhere near as insane as they were 20 years ago, as the dot-com bubble got closer to bursting:

FactSet

Stock valuations look high now, but are still much lower than they were toward the end of the dot-com boom 20 years ago.

Tech stocks with lower forward P/E ratios

There are 70 companies in the S&P 500 information technology sector. But the sector doesn’t really include every company that the typical investor would consider a technology player. So we added social-media companies, video-game developers and internet services companies, such as Amazon.com AMZN, +0.48%, to bring our “technology” list up to 80 companies.

Among these companies, only 11 have lower forward price-to-earnings ratios than they did a year ago, based on consensus earnings estimates among analysts polled by FactSet. Here they are, sorted by total returns over the past year (with dividends reinvested):

You can click on the tickers for more about each company, including business profiles.

Valuations for rapidly growing Autodesk ADSK, +1.05%, Netflix NFLX, -1.06%  and Twitter TWTR, +0.51%  are still high relative to the tech sector. The majority of sell-side analysts covering Autodesk and Netflix are still positive on the stocks. However, their 12-month price targets aren’t much higher than the current prices, as you can see on the third table.

Leaving the group in the same order, here are sales and earnings-per-share results for the past 12 reported months, from the year-earlier 12-month period:

Here’s a summary of sell-side analysts’ opinions about these tech companies:

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