Last year, a handful of large-cap tech stocks were responsible for most of the valuation expansion in the sector. A different pattern is playing out this year.
High flyers like Amazon.com Inc. and Nvidia Corp. are still handling most of the sector’s outperformance, but what is different this year is that the 10 biggest companies on average are seeing their earnings multiples shrink. It was “primarily the non-FANG stocks that became more expensive,” Bernstein analysts including Toni Sacconaghi said in a research note.
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On a market cap-weighted basis, the earnings multiples of the 10 largest tech companies in the sector have contracted by 2 percentage points this year, data from Bernstein’s quant team show. At the same time, the sector’s broad-based multiple expansion in 2018 has pushed the sector to trade at 1.18 times the market’s price to forward earnings, the highest among its industry peers.
Still, the sector that has advanced 11 percent this year compared with a 2 percent gain in the broader market is a buying opportunity to Bernstein. The bias is now toward value over growth.
“For the first time in years, tech has become meaningfully more expensive,” the analysts said. “We continue to recommend both a modest overweight in tech and a balanced barbell between growth and value… although our bias is to add selectively to the value side of the barbell.”
Echelon Corporation develops, markets, and sells embedded components, modules, edge servers, and software. The company offers chips, gateways, and design and management software to original equipment manufacturers under the LONWORKS and IzoT brands. It also provides a range of control networking solutions under the LumInsight and Lumewave by Echelon brands that consist of wired and wireless control nodes; smart gateways for interconnecting the control nodes; and a software-based Central Management System, which is used for startup, commissioning, management, and monitoring of the lighting network. The company markets its products in the Americas, Europe, the Middle East, Africa, and the Asia Pacific/Japan through direct sales organization, third-party electronics representatives, value-added resellers, and distributors. Echelon Corporation was founded in 1988 and is headquartered in Santa Clara, California.
Lantronix, Inc. provides secure data access and management solutions for Internet of Things (IoT) assets in the Americas, Europe, the Middle East, Africa, and the Asia Pacific Japan. The company's IoT products include IoT gateways, which provide secure connectivity and the ability to add integrated device management and advanced data access features; and IoT building blocks that offer basic secure machine connectivity and unmanaged data access. It also offers information technology (IT) management products, which comprise console management, power management, and keyboard video mouse products that offer remote access to IT and networking infrastructure deployed in test labs, data centers, and server rooms; and xPrintServer. The company provides its IT management product line and external IoT solutions through value added resellers, systems integrators, distributors, consumers, online retailers, IT resellers, corporate customers, and government entities, e-tailers, original design manufacturers, and original equipment manufacturers. Lantronix, Inc. was founded in 1989 and is headquartered in Irvine, California.