In many ways, there has 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 (TSLA - Free Report) continues to climb despite disappointing earnings reports, and it’s why Amazon (AMZN - Free Report) has become one of Wall Street’s hottest 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 21.08, which is significantly “worse” than the S&P 500 average of 17.22.
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 does not mean we cannot have a little fun with it. Check out these three popular tech companies with ridiculous P/E ratios:
1. GoDaddy Inc. (GDDY - Free Report)
Trailing 12-Month P/E: 171.68
A leader in domain name licensing, GoDaddy 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. GoDaddy has only recently cemented consistent profits, but investors were willing to pay more for an industry-dominating internet stock with exciting growth prospects. Looking ahead, the company is expected to improve its earnings at an annualized rate of 20% over the next three to five years, so investors should expect this valuation to become less stretched over time.
2. HubsSpot, Inc. (HUBS - Free Report)
Trailing 12-Month P/E: 388.00
HubSpot is a fast-growing inbound marketing software company that went public in late 2014. This is another example of a young tech firm with a great product that only recently became profitable on a non-GAAP basis. HubSpot’s platform is a top choice in the marketing field, so it is no surprise to see investors “over pay” for the stock with that dominance in mind. Going forward, HubSpot should emerge as a big data and AI play, which could lead to even more speculative trading. Still, our consensus estimates are calling for the company’s EPS figures to improve by 60% in the current fiscal year and an additional 78% next year.
3. Square, Inc. (SQ - Free Report)
Trailing 12-Month P/E: 1052.75
This game-changing mobile payments firm has solidified its place as one of Wall Street’s favorite growth stocks over the past year or so, but as is the case with most tech growth picks, Square has an apparently-stretched valuation right now. Square has only recently started to turn non-GAAP profits, which has inspired even more investors to jump on the stock. Shares of SQ have skyrocketed more than 190% over the last 52 weeks alone. And Square’s earnings growth is expected to come quickly. The company’s Forward P/E is a slimmed-down 93.70, so its valuation is clearly improving.
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