2018 Outlook What to expect from the Tech sector

Tesla’s recent Roadster revamp and a new prototype electric truck are little short of brilliant. Unfortunately, profits don’t come from brilliance alone. Concern over its increasing cash burn and ballooning debt have dragged its shares 20% off record highs after it splurged $1.1bn in Q3, with plans to shell out another $1bn in Q4. With ‘just’ $3.5bn in cash and liquid assets at quarter end, Tesla eyes expenditure of $20bn in years ahead.

Most will be in debt, adding to around $6.8bn already owed. None of this matters to Tesla buyers though. Compare Tesla’s 5-year share price rise to the S&P 500’s 5-year total return (Figure 1). What’s driving Tesla’s outperformance? Well, consensus forecasts see profits of $11bn in 2030.

Discount that back to now at a nominal 10% rate of return and Tesla shares trade at an undemanding multiple of 18; more plausible than its current 28 times 2020 earnings multiple. But even to justify the lower multiple, Tesla needs to make at least one million cars a year by 2020. Yet it routinely misses targets. Until that changes Tesla’s Big Tech multiple will be huge bait for short sellers. The stock was the most shorted U.S. stock in June, and has certainly been the most profitable auto sector short this year.

NVIDIA’s chips will stay up Graphics card maker NVIDIA is one of 2017’s biggest tech stock gainers. Can its shares rise significantly more in the medium term? They trade at a chunky 50 times full-year earnings, revealing far higher growth expectations than the measly progress expected for rivals Intel and Samsung. However, that pair’s market share in graphics cards is small. After NVIDIA’s revenue rose 31.5% in Q3 we see risks to the upside.

All its key segments beat forecasts: gaming, cryptocurrency mining, datacentres and cars, expanding its underlying gross margin by 50 basis points to 59.7%, above guidance. Its finances are solid too. Cash and liquid assets rose 7.5% to $6.3bn in Q3. Total debt was $2bn, keeping leverage manageable.

True, lower than expected Q4 guidance was a glitch. That helps explain why Wall St’s consensus target price of $210 has been below the current market price for weeks. Still, we see no compelling reason to expect NVIDIA growth trends to flag. On-target earnings for the next two years equate to a share price upwards of 465p, a little more than 100% higher. After the shares doubled in 2017 it’s not an implausibly punchy call.

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement.