In many ways, there’s been a changing of the guard on Wall Street over the past several years. The transition from on-the-floor traders to algorithm-based digital trading has been well-documented, and even our preferred methods for determining value and growth potential have changed.
With that said, one of the most polarizing new trends on the stock market relates to the use of traditional valuation metrics on tech stocks—or the lack of use, I should say.
For better or worse, investors are quick to disregard old-school methods like the P/E ratio in favor of heavy optimism about the future.
It’s the reason that Tesla Inc (NASDAQ:TSLA) continues to climb despite disappointing earnings reports, and it’s why Amazon.com, Inc. (NASDAQ:AMZN) has become one of 2017’s hottest tech stocks—even with its “F” grade for Value in our Style Scores system.
Interestingly enough, according to our Zacks Sector Rank data, the broad “Computer and Technology” sector has an average P/E ratio of 23.36, which is significantly “worse” than the S&P 500 average of 18.85.
Of course, a lot of this comes with the territory and is direct result of exposure to certain market conditions that are unique to tech companies.
However, that doesn’t mean we can’t have a little fun with it. Check out these three popular tech stocks with ridiculous P/E ratios:
Yelp Inc (YELP)
Trailing 12-Month P/E: 428.0
Despite its power to single-handedly influence where I choose to go to dinner, Yelp Inc (NYSE:YELP) hasn’t always been the best performing stock out there. In fact, the stock is down about 20% year-to-date, and with a trailing 12-month P/E ratio of 430, it’s certainly not a value investor’s top choice. What’s worse, our current consensus estimates are calling for full-year earnings to dip about 18%, sending the company into the red and dragging its PEG ratio to -17.16.
Salesforce.com, Inc. (CRM)
Trailing 12-Month P/E: 465.6
Salesforce.com, Inc. (NYSE:CRM) is one of the most well-respected cloud computing and CRM companies in the world, but it has traditionally struggled to turn profits. It treats its customers like royalty and is consistently rated a top place to work, but that might cut into the bottom line, and its trailing 12-month P/E is uninspiring.
However, the company’s Forward P/E of 218.9 is a significant improvement, and our current consensus estimates are calling for full-year and next-year EPS growth of 55% and 71%, respectively, so things could be changing soon.
GoDaddy Inc (GDDY)
Trailing 12-Month P/E: 862.2
A leader in domain name licensing, GoDaddy Inc (NYSE:GDDY) skyrocketed to fame thanks to a series of raunchy TV commercials that had very little to do with its business. Regardless, the company is good at what it does. But no, that is not a typo. GoDaddy’s trailing P/E ratio is really that high.
However, like Salesforce, things are getting better. The company’s Forward P/E is a slimmed-down 126.4, and on top of that, its P/S ratio — a valuation metric preferred for tight-margin tech companies with strong revenues — is a better-than-industry-average 1.79.
Want more market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!
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