Tech Stocks Are Richly Valued And Should Be

Tech Stocks Are Richly Valued And Should Be


Are technology stocks in a bubble? The Nasdaq composite index, home to tech superstars like Amazon, Apple, Facebook and Microsoft, is up more than 21% this year. The boom is not just an American phenomenon. China’s Alibaba is up 24%, Taiwan’s TSM 38%, Germany’s SAP 20% and Australia’s Atlassian 47%. The S&P 500 Semiconductor ETF is up 19% for 2020.

All very impressive. But one category of tech stocks has surpassed all others. These stocks are what the U.S. firm Bessemer Venture Partners calls “emerging cloud” companies. In 2013, Bessemer created its BVP Nasdaq Emerging Cloud Index, or EmCloud, to track returns in the cloud sector. This year, EmCloud’s index of 52 stocks—which includes fast-growers like Adobe, Atlassian, Crowdstrike, ServiceNow and Zoom, but excludes large cloud incumbents like Amazon, Google, Microsoft and Oracle—is up 65%.

To repeat: Are EmCloud stocks (and tech stocks overall) in a bubble? Value investors say so: EmCloud’s median market-cap-to-sales ratio is 18, which at first glance looks awfully bubbly. But look closer and you’ll see something else: the annual growth rates and trailing, 12-month free-cash-flow margins of most EmCloud stocks are very strong. Take network security firm Crowdstrike. Its free cash-flow margin is 17% while its growth rate is 82%. While Crowdstrike’s future growth rates will slow, it’s also likely that its free cash-flow margins will increase, since Crowdstrike’s gross margins are over 70% and are improving.

So the correct answer is, yes, tech stocks and the EmCloud index are very richly valued. But, no, they do not form a tech bubble like that in 1999. These stocks represent companies that are changing business, education, medicine and society at warp speed, and most are financially strong.

Note that EmCloud is not just this year’s fashion. The index is up 835% since its formation in August 2013. But its glorious future was foretold two years earlier when Marc Andreesen, a software entrepreneur and venture capitalist, wrote a now-famous essay titled “Why Software Is Eating The World.”

As Andreessen wrote: “More and more major businesses are being run on software and delivered as online services—from movies to agriculture to national defense. Many of the winners are Silicon Valley-style entrepreneurial technology companies that are invading and overturning established industry structures. Over the next 10 years, I expect many more industries to be disrupted by software.”

It was a bold vision. Many who read Andreesen’s essay then, including this columnist, wish they had acted and invested more aggressively. The good news is that there is still time. At start of 2020, the biggest business story was the accelerating rate of business adaptation forced by underlying technologies—Cloud, Edge, AI and 5G—that were evolving and converging quickly and weaponizing disruption. Then came Covid. The idea that the pandemic’s slowing effect on the economy would also slow technology adoption was mistaken.

In hundreds of recent conversations I’ve had with CEOs, CFOs, entrepreneurs and board members, I’ve heard the same story. Adaptation now tops every CEO’s priority list. How work is done in the new normal, how product development occurs, how companies go to market and sell, how they protect their balance sheet while investing in the future—every CEO sees no future without rapid technology workarounds and adaptation.

ServiceNow’s CEO, Bill McDermott, told me this: “Today, every leader of business knows that the only way to win is to get to the future much faster. If you don’t feel the need for speed, you haven’t woken up yet.” McDermott predicts $3 trillion will be invested in digital transformation over the next few years. The clock has started.

Numbers were calculated at U.S. market close, August 5, 2020.

Rich Karlgaard is editor at large at Forbes. As an author and global futurist, he has published several books, the latest of which is Late Bloomers, a groundbreaking exploration of what it means to be a late bloomer in a culture obsessed with SAT scores and early success. For his past columns and blogs visit our website at

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