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.