David Einhorn of Greenlight Capital thinks so. In a letter to his hedge fund's investors, Einhorn remarks:
Now there is a clear consensus that we are witnessing our second tech bubble in 15 years. What is uncertain is how much further the bubble can expand, and what might pop it.
When the Internet bubble popped over a decade ago, some of today's stalwarts and established companies dropped dramatically. Cisco Systems fell close to 90%, while Amazon.com collapsed over 90%. At the time, almost any company listing on the Nasdaq, related to the Internet, or even better – having .com in its name, would shoot up after its IPO and continue to rise regardless of the fundamentals. Today, many companies are reaching enormous valuations again, but whether their valuations will come crashing down is another question. Interestingly, even today, Amazon possesses a lofty valuation on traditional metrics such as P/E and multiples of sales and cash flow.
Why Einhorn thinks we are in a bubble
In Greenlights' report, Einhorn also remarks, "[i]n our view, the current bubble is an echo of the previous tech bubble, but with fewer large capitalization stocks and much less public enthusiasm." Greenlight believes that there are several indications of the overvaluation of technology stocks such as the dismissal of traditional valuation principles, the forced covering by short sellers being squeezed by the constant up trend, and the exorbitant rises in stocks following their initial public offerings only because they use the right buzzwords to attract capital.
Greenlight revealed in its report that due to the bubble nature of the market, it was shorting a group of momentum stocks that have been consistently rising and reaching astronomical valuations. The hedge fund did not disclose which stocks it was shorting, however.
What is Einhorn shorting?
There is no way to discern which stocks Einhorn is referring to in his report but he has had success in the past shorting stocks before their precipitous fall. Einhorn famously shorted Lehman Brothers before its bankruptcy and Allied Capital before its illegal accounting practices were revealed. Perhaps, Einhorn is shorting Amazon today due to its valuation. Some other technology related companies with high valuations today are Facebook, (NASDAQ:FB), LinkedIn Corporation (NYSE:LNKD.DL), Netflix, (NASDAQ:NFLX), and Twitter, (NYSE:TWTR). The following chart shows the aforementioned companies' P/E, Price/Sales and Price/Cash Flow multiples.
If you bought the cheapest of the bunch on a P/E basis, you would still be paying over 100 times earnings for Facebook. If you wanted to be "frugal," you could pay "only" twenty-eight times for Amazon's current cash flow; if you wanted to roll the dice, you could pay 5000 times for Twitter's. To put these valuations in perspective, the P/E multiple of the S&P 500 is currently 18; its P/S multiple is 1.7, and its P/CF multiple is 10.9. It is clear to see that you are paying a significant premium to the overall market if you decide to purchase the stock of any one of these companies.
These companies have to perform flawlessly and encounter little resistance to grow into their lofty valuations. Although none of these stocks may be what Einhorn is shorting, they give a glimpse into the extremely high valuations in the space. Investors should tread carefully investing in the technology arena going forward. They certainly won't be capitalizing on low valuations if they decide to invest in any one of the aforementioned stocks.
Andrew Sebastian has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Cisco Systems, Facebook, LinkedIn, Netflix, and Twitter. The Motley Fool owns shares of Amazon.com, Facebook, LinkedIn, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.