With Internet firms dominating tech growth, investors paying up for it – USA TODAY
SAN FRANCISCOâ Technology investors looking for growth this year can find it in Facebook, Alibaba and other Internet companies, but only if they’re willing to pay up for their shares.
Among the 30 most valuable tech firms , Facebook is expected to have the fastest revenue growth in 2016 but also the highest price-to-sales ratio, according to an analysis of estimates from Wall Street analysts polled by Thomson Financial.
The company founded by Mark Zuckerberg is just the foremost example of how Internet companies have now got a near-monopoly on double-digit growth in the sector.
Indeed, all but one of the 10 tech companies expected to grow fastest in their current fiscal year generate their sales exclusively over the Internet.
By stark contrast, no maker of chips, hardware or enterprise software is expected to come close to 10% year-over-year growth.
(Apple’s fiscal year ends in September and Microsoft’s in June.)
And with Oracle (ORCL)Â sales expected to fallÂ 2.5% for its fiscal year ending in May and Verizon (VZ) revenue seen flat in 2016, analysts expect four of the 10 most-valuable tech firms to show no growth this year.
That’s why tech investors are willing to pay up for the shares of companies that are promising robust growth.
Valuing sales growth
With a market cap of $309 billion and expected 2016 revenue of $25.5 billion, Facebook has a price-to-sales ratio of 12.1 â the richest of the 30 most valuable firms. Price to sales, found byÂ dividingÂ the market cap of a company by its past or expected revenue, showsÂ how much investors are willing to payÂ for every $1 of sales a company makes.
Chinese Internet rivals Alibaba and Tencent are not far behind with ratios of 11.4 and 11.5, respectively.
(Alibaba’s current fiscal year ends this month, while Tencent’s numbers are based on estimates for Dec. 2015 full-year revenue, which the company is expected to report March 17.)
Adobe Systems (ADBE), the only tech company among the 10 fastest-growing that’s not a pure Internet play, is a distant fourth in terms of premium, with a price-to-sales ratio of 7.5.
Yahoo’s (YHOO)Â ratio of 7.1 may look like a surprise at first glance, given that its sales are seen falling 9% this year, because investors don’t usually pay a premium for companies with shrinking top lines.
Yet the stock is essentially a tracking issue for Alibaba shares, thanks to Yahoo’s huge stake in the Chinese giant.
The next richest price-to-sales ratios belong to Priceline.com,Â Salesforce.com, Google parent Alphabet and Netflix, all among the 10 fastest- growing tech giants.
In an upcoming column,Â I’ll take a look at how price-to-sales ratios can help retail investors evaluate stocks of competing companies in specific tech sectors, including enterprise software and telecom services.
Fastest growing tech giants, by 2016 Y/YÂ expected revenue growth:
1. Facebook +42%
2. Alibaba +32%
3. Netflix +29%
4. Baidu.com +22%
5.Â Salesforce.comÂ +22% (tie)
6. Amazon +21%
7. Adobe +20%
8. Tencent +19%*
9. Alphabet +16%
10. Priceline +16% (tie)
(*Based onÂ 2015 estimates.)
Source: Thomson Financial
Highest price to sales ratios among the 30 most valuable tech companies (Market Cap/latest revenue estimate)
1. Facebook 12.1
2. Tencent 11.5
3. Alibaba 11.4
4. Adobe 7.5
5. Yahoo 7.1
6. Priceline.com 6.0
7. Salesforce.com 5.8
8. Alphabet 5.75
9. Netflix 4.9
10. Taiwan Semi 4.56
John Shinal has covered tech and financial markets for more than 15 years at Bloomberg, BusinessWeek,TheÂ San Francisco Chronicle, Dow Jones MarketWatch, Wall Street Journal Digital Network and others. Follow him on Twitter:Â @johnshinal.