After a wild year in the stock market, 2023 leaves one sector that takes the crown as a clear winner. Technology stocks have been all the hype in the past few months, bringing new hopes of an economic recovery and shaking away the fears sparked by interest rate hikes.
The charts don't lie. The price action in the Technology Select Sector SPDR Fund (NYSEARCA: XLK) after beating the S&P 500 by as much as 29.3% on a year-to-date basis solidifies the sentiment toward this group.
One of the biggest winners in the technology sector is Meta Platforms (NASDAQ: META). The stock has jumped from roughly $120 a share at the beginning of the year to today's $317 a share. However, it seems the rally has run out of steam as CEO Mark Zuckerberg sold $185 million worth of META stock.
The stock recently fell from a high of $342.9 a share to its current $316.5, a decline of almost 8.0% in just two trading weeks. Some may have seen this decline coming, as the market had been quietly leaving some breadcrumbs as evidence of their current sentiment toward the stock.
Taking the industry as a whole, you can see how the average price-to-earnings ratio of 35.3x creates a wide gap compared to where the market values Meta today. Sitting at a 22.3x P/E, there seems to be little willingness to pay up for the underlying earnings of this business.
In other words, the rally has been exhausted. Today's stock price reflects some closeness to the company's fair valuation. Looking at analyst price targets may confirm the theory that Zuckerberg decided to sell at the right time. After all, who knows the fair value of the company better than the founder himself?
With a consensus of $349.5 a share target, analysts see only a 10.3% upside from today's prices. This is close to where the stock traded right before the two-week decline and likely where Zuckerberg also decided to sell some of his stake.
More than that, analysts had projected earnings per share to rise by as much as 23.1% this year, and when everything else is the same, stock prices should behave in line with the growth or decline of EPS.
Considering that the stock more than doubled, it would be safe to say that any remaining EPS growth is already priced into the stock. If that doesn't convince you, think about Zuckerberg getting the best of you after he dumped a fairly valued stock.
So, what are markets to do now that one of their favorite trades has run its course? Well, bonuses still need to be earned, so they are looking into another success story, this time in Snowflake (NYSE: SNOW), but more on that in just a bit.
A new favorite
Using the same approach to determine where the new industry favorite may be found, you can again compare the average P/E of 35.3x against a significant outlier like Snowflake. This stock trades significantly above the industry at 282.9x. A market willingness to overpay for this company's earnings can only come from one place.
While the industry is expecting to grow its EPS by an average of 16.6%, analysts are happy to place a growth rate of 48.5% for Snowflake. An industry-beating growth rate can surely justify a premium valuation.
Based on these ratios alone, the story begins to make a lot of sense, but have markets already eaten away at the upside as well? The latest financial results from the third quarter of 2023 reiterate that this is one booming business with a stock that keeps breaking new ceilings.
Some bears thought the passing of the COVID-19 pandemic would put a dent in this cloud business. However, with revenues alone rising by as much as 34% over the past twelve months, Snowflake is far from a dying business.
Now, all software companies can have a streak of good luck, but a retention rate of over 100% indicates that Snowflake's success is not just a quarterly fluke but a brand penetration - and adoption - story that is likely here to stay.
Management is aware of the rising sentiment and momentum in the stock. Counting on continued financial expansion, they have decided to repurchase up to $400 million worth of stock, representing roughly 1.0% of the company's market capitalization. Talk about confidence!
With a recent rally of 32.1% during the same time that Meta declined from its highs, there is not much else to say other than the markets have picked a worthy replacement to Meta.