Tech stocks were red hot in 2020. Companies bringing to market new, advanced technologies -- often technologies that aren't yet producing profits for their makers -- helped power the S&P 500 past 16% total gains last year, and propelled the tech-heavy Nasdaq to a 43% gain.
But enough is enough, warns Goldman Sachs.
All three stocks took a tumble in Monday trading, and as we roll past 12:45 p.m. EST, Plug shares are down 3.6%, CrowdStrike is down 3.9%, and DocuSign is down 5%. But what is it, exactly, that Goldman Sachs has against these three disparate stocks?
In a word: valuation.
"Equity valuations" in general "are extremely elevated on an absolute basis," warns the analyst in a note out this morning. And yes, low interest rates (and therefore unattractive returns from savings accounts and bonds) are one reason why stocks are trading so high. But Goldman has identified 39 specific stocks that look especially frothy right now -- Plug, DocuSign, and CrowdStrike among them. None of these three stocks is currently profitable. Each of these three, warns the analyst, trades at a historically extreme valuation above 20 times sales.
Indeed, according to the most recent data from Yahoo! Finance, shares of DocuSign sell for 36 times trailing-12-month sales, CrowdStrike costs nearly 63 times sales, and Plug costs more than 68 times.
What does this mean for investors? Crunching historical data, Goldman notes that "since 1985, the median stock trading at an enterprise value-to-sales multiple above 20 times has garnered a subsequent 12-month return of -1%, compared with 6% for the median U.S. stock." In other words, not only do stocks valued as highly as Plug, DocuSign, and CrowdStrike tend to underperform more reasonably priced stocks, they actually tend to decline in value, inflicting losses on investors who hold fast to them. And with Plug, DocuSign, and CrowdStrike all selling for multiple times higher than the multiples that tend to underperform. Investors in these three stocks can probably expect exponentially worse returns going forward.
Caveat investor. Stocks don't rise forever.