For tech giants on Wall Street, it's almost as if the worst global pandemic in modern history never happened. Despite trillions of dollars in lost economic activity and tens of millions of lost jobs because of COVID-19, shares of most tech companies are currently trading where they were before the outbreak.
The remarkable – and remarkably rapid – rebound out of this year's bear market by the S&P 500 Information Technology Sector Index is all the more astonishing given that the broader S&P 500 Index is still down a double-digit percentage, according to S&P Global Market Intelligence. Further, the bounce has returned the IT index to rarified air, approaching record valuation levels.
That's the case even as business deteriorates for most tech vendors, which should, theoretically, make them less valuable to investors. S&P Global Market Intelligence data for the IT sector shows revenue growth has dropped to 7.7% for the past four quarters, down from a compound annual growth rate (CAGR) of 12.3% over the previous three years. More notably, earnings have flatlined after expanding at a three-year CAGR of 16%. (Undoubtedly Q2 results, which will be released starting in a little more than two months, will drag down both of those measures, possibly by historic amounts.)
Investors may be discounting the continuing risk the coronavirus pandemic poses to these tech companies, but the companies themselves are not. In both action and words, tech vendors appear to be bracing for a recovery that drags on much longer than envisioned in the optimistic 'V-shaped recovery.'
Tech giants have trimmed or pulled their financial guidance for the rest of 2020 at a record pace. They have shored up their balance sheets. They have tabled most of their discretionary purchases, including M&A. As they made all of these bearish moves, their stocks traded bullishly.
Highlighting the disconnect, consider this: In April, a month that saw the S&P IT index soar 13%, tech acquirers listed on the Nasdaq and NYSE announced just half the number of deals they did in the opening months of the year, according to 451 Research's M&A KnowledgeBase. In both the number of deals and the spending attached to them, public companies are doing tech transactions in the current coronavirus era at the same rate as they did at the bottom of the Credit Crisis.
Yet, on one crucial measure, the comparison breaks down. The rich valuations of tech vendors today are way out of line when viewed against the previous recession. S&P Global Market Intelligence data shows companies in the IT index are currently trading at 5x sales and 17x EBITDA, or about three times higher than where they were in early 2009.
Brenon Daly oversees the financial analysis of 451 Research's Market Insight and KnowledgeBase products, having covered more than a quarter-trillion dollars' worth of deal flow for both national publications and research firms.
Sheryl Kingstone leads 451 Research’s coverage for Customer Experience & Commerce, which covers the many aspects of how customer experience is a catalyst for digital transformation. She oversees the company’s coverage of a variety of customer experience software markets spanning ad tech, marketing, sales, commerce and service.
Keith Dawson is a principal analyst in 451 Research's Customer Experience & Commerce practice, primarily covering marketing technology. Keith has been covering the intersection of communications and enterprise software for 25 years, mainly looking at how to influence and optimize the customer experience.