Why you shouldn't be concerned by the high PE multiples of ASX tech shares

Here's why you shouldn't be concerned by the high PEs of Appen Ltd (ASX:APX), Altium Limited (ASX:ALU), and Kogan.com Ltd (ASX:KGN).

| More on:
person touching digital screen featuring array of icons and the word saas

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

One common concern that many investors have about shares at present is the higher than normal multiples they trade on.

This has sparked fears that certain shares may be overvalued and that a meaningful pullback could be coming or future returns will underwhelm.

However, one leading equity strategist believes that these higher valuations will dominate the next decade.

According to Credit Suisse's chief U.S, equity strategist, Jonathan Golub, courtesy of the AFR, he sees no reason to be concerned with the fact that U.S. shares are trading at an average price to earnings multiple of 22.2 times at present. Even though historically this would suggest that future returns will be below zero over the next decade.

In fact, he suspects these multiples could yet go higher from here. He commented: "My personal expectation is that we will see stock multiples in the mid-20s in the US for the next decade ahead."

Why will multiples go higher?

The equity strategist believes multiples will go higher due to ultra low interest rates. He notes that the current U.S. corporate bond yield of 3.3% implies a price to earnings multiple of 30.6 times.

Mr Golub added: "We never had in the past interest rates that have been this low, both in terms of the spread and the 30-year bond yield and the 10-year bond yield. The more cash you have in a slower-growing world, the more your assets are worth."

But where should you invest? Mr Golub believes that "growth and technology will win versus value and old economy."

This could be good news for the shareholders of growth and tech shares such as A2 Milk Company Ltd (ASX: A2M), Appen Ltd (ASX: APX), Altium Limited (ASX: ALU), and Kogan.com Ltd (ASX: KGN).

At present, investors are paying 27x, 37x, 58x, and 42x estimated FY 2021 earnings, respectively. While this might look expensive on paper, given the above and their positive long term growth outlooks respective to the market average, they could yet prove to be great value growth options.

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Altium. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Kogan.com ltd. The Motley Fool Australia owns shares of A2 Milk and Appen Ltd. The Motley Fool Australia has recommended Kogan.com ltd. 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. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Growth Shares

a happy investor with a wide smile points to a graph that shows an upward trending share price
Growth Shares

Here are the top five ASX 200 shares in Macquarie's model growth portfolio

These ASX 200 shares are highly rated by analysts at Macquarie.

Read more »

a man with a wide, eager smile on his face holds up three fingers.
Growth Shares

3 ASX shares to buy in 2024 and hold for the next 10 years

Analysts think these top shares are in the buy zone right now.

Read more »

A man leans forward over his phone in his hands with a satisfied smirk on his face although he has just learned something pleasing or received some satisfying news.
Growth Shares

4 ASX growth shares I think will benefit from interest rate cuts in 2024

Not only will home loan holders rejoice, investors of these stocks could also be yelling with joy when the Reserve…

Read more »

A smiling woman sits in a cafe reading a story on her phone about Rio Tinto and drinking a coffee with a laptop open in front of her.
Growth Shares

3 of the best ASX growth shares to buy now

Analysts see plenty of upside for these buy-rated shares.

Read more »

A man and woman in an office look at a laptop and discuss investing, budget strategies or other financial concepts
Growth Shares

Here's why analysts love these buy-rated ASX 200 growth shares

There's a reason analysts are feeling bullish about these companies.

Read more »

A woman with strawberry blonde hair has a huge smile on her face and fist pumps the air having seen good news on her phone.
Growth Shares

Big returns could be coming for high-flying Lovisa shares

Morgans doesn't believe it is too late to snap up this hot stock.

Read more »

Smiling young parents with their daughter dream of success.
Growth Shares

Why these ASX 200 growth shares could be top buys now

Analysts are feeling bullish about these growth stocks. Let’s see what they’re saying.

Read more »

Concept image of a man in a suit with his chest on fire.
Growth Shares

Ignore the noise and buy this hot ASX growth stock

A recent pullback may have created a buying opportunity according to Bell Potter.

Read more »