Tech Top 10 Ranked By Value

Background

I'll break with convention and begin with a couple disclosures. I'm a conservative value investor. Currently, that boils down to essentially two views; I'm generally convinced that technology stocks are overpriced and they are headed for steep declines. I am currently betting against the NASDAQ 100-Index (NDX) with a 5% position in ProShares Short QQQ ETF (PSQ). As a retired engineer, I arrived at that strategy methodically. I subsequently published my work in an analysis entitled PSQ: Short Nasdaq On Recession Fears.

I will also disclose that I'm 51 years old and I have sufficient wealth to live conservatively until my death. However, I would be pleased to have more capital and thus more choices or happier heirs. I have recently become more interested in technology and growth stocks exactly because economic and market outlooks appear gloomy. In short, I expect excellent buying opportunities on some of the very best technology stocks in the coming months.

Much of my recent work has been directed towards assembling a shopping list for the purpose of buying the dip. I would like to be prepared to buy the most favorably valued companies who have historically produced growing revenue with expanding margins. My first step is to evaluate the top 10 technology stocks by market cap using a value matrix.

Assembling the Value Matrix

If the economy does turn gloomy, even the biggest technology stocks could decline sharply. One could logically expect earnings misses and conflicting analyst outlooks. For those reasons, the value matrix will combine current price/sales ratios with historic data including:

• 3Yr average revenue growth
• 3Yr average net income margin
• net income margin growth (average FY 20-22 vs average FY 17-2019)
• 3Yr average leveraged FCF margin
• leveraged FCF margin growth (average FY 20-22 vs average FY 17-2019)

All data were assembled from Seeking Alpha's financial sheets and are presented graphically below. Each set of columns is annotated with a 3Yr growth value calculated as follows:

growth = (2022 3Yr SMA - 2019 3Yr SMA) / 2019 3Yr SMA

Revenue: 3Yr Simple Moving Average

Net Income Margin: 3Yr Simple Moving Average

Levered FCF Margin: 3Yr Simple Moving Average

Current Prices/Sales (TTM), FY 22 3Yr averages, and growth rates are assembled below. Each value was ranked by means of an inclusive statistical percent rank calculation. The value matrix was calculated as the sum of the statistical percent ranks of each factor.

Value Matrix Chart

The value matrix chart is sorted from most favorable value (highest matrix score) to least favorable value (lowest matrix score). The value matrix chart is presented graphically below.

Value Matrix Plot

Based on the value matrix, the three most favorably valued top 10 technology stocks are:

1. ASML Holding N.V. (ASML)
2. Salesforce, Inc. (CRM)
3. Microsoft Corporation (MSFT)

Despite the greatest revenue growth and a better than average net income margin, NVIDIA Corporation (NVDA) ranked dead last with the single lowest Price/Sales ratio and net income margin combined with less than average levered FCF margin and levered FCF margin growth.

Matrix Limitations

Every effort was made to evaluate the top 10 technology stocks objectively. However, several notable determinations were made in the construction of the value matrix starting with the ten stocks selected. Any one of these stocks could be compared with some other group such that that stock would receive the highest score.

Further, all of the factors selected were calculated on 3Yr historical averages. Current annual, current quarterly, or forward estimated values would all produce different results. Lastly, the value matrix did not consider any company specific guidance or a complete analysis of any of the stocks evaluated.

Conclusions

I began by disclosing that I expect technology stocks to decline in the coming months as the current rally loses steam on a slowing economy or perhaps some other as yet unimagined gloom. Exuberant peaks and worrisome bottoms are familiar market fixtures over most time scales.

However, it is my intention that my work be useful to as many investors as possible even those who disagree with my short-term outlook or the specific conclusions of this analysis. I hope that those investors who currently hold any of the stocks discussed or even betting on a continuing rally find my work useful in some way.

In every battle there comes a time when both sides consider themselves beaten. Then he who continues the attack wins. - Ulysses Grant

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.