Many are concerned about “bubble” valuations for firms linked to artificial intelligence. And looking at price-to-sales ratios, Amazon, Alphabet, Meta, Microsoft and Nvidia have higher ratios than prior to the launch of ChatGPT, for example.
That also applies to the “technology-heavy” Nasdaq index as well. Hence the concern about valuations being in a "bubble."
source: Blake Heimann, Wisdomtree
But it might also be worth noting that price/sales ratios for Amazon, Alphabet and Meta are not out of line with their respective 10-year P/S ratios. In fact, Meta seems to have lower P/S than it did a decade ago.
That cannot be said for Microsoft and Nvidia, both of which have much-higher P/S ratios than has been the case for most of the past decade. The Nasdaq index likewise seems to show significantly-higher P/S ratios at present than over the past 10 years.
So if you are looking for possible overvaluation, Nvidia is where the greatest danger lies, with Microsoft and the Nasdaq index both showing possible overvaluation (or simply higher growth expectations). Right now we simply cannot tell whether the valuations are merited or not.
In fact, some might argue that Amazon has lower P/S and price-to-equity ratios than it has had over the last decade. Some will argue that is because so much of Amazon’s revenue comes from e-commerce and is at risk if a recession occurs and shoppers reduce their spending.
As always, one’s perspective matters. Are sales going to grow enough to justify the higher ratios and valuations, or is too much growth expected? Or, looking at it another way, even if the higher growth does materialize, will that growth take longer than presently expected?
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