In an interview with Bloomberg on May 6, David Einhorn put forth his thesis that part of the tech sector is in an “echo bubble,” and that the party is almost over for solid companies that have become the victim of investor over-exuberance.
In the interview, Einhorn stopped just short of taking the market fundamentalist approach when realistically evaluating companies, saying that we need to look more closely at “what I’ll call for simplicity, P/E (profit-to-earnings)” ratio referencing that stalwart statistic favored by most old-school value investors. Simplicity or no, his assertion does fall in line with what fundamental-minded tech naysayers have said for years: that the lack of a correlation between earnings and valuation in the sector has created a tech bubble, one due to pop at any time.
Einhorn is not one for absolutes, though. While he bristles at saying we should look strictly at P/E when evaluating a company, he also says we should not look strictly at all companies within tech when singling out overvalued companies. More specifically, he predicts a fall for tech plays in an “echo chamber,” or ones that are otherwise good but have inflated far past their realistic valuation.
He declined to name names, so to speak, in a clear ploy to stoke interest in his investor newsletter while protecting current subscriber’s interest. AthenaHealth was the clear exception, who he said is a good company at “the wrong price.”
While the famed short-seller was reticent to talk about other tech plays he is skeptical of besides AthenaHealth, it’s not hard to dig up the ones with the highest P/E ratios – or, the ones whose stock is wildly higher than their earnings can realistically support. Some notable names include WebMD (WBMD) with a P/E ratio of 130; LinkedIn, (LNKD) , with a ratio of 794; and GrubHub ($GRUB), whose P/E is an astronomical 1054. Fundamental investors usually consider a P/E above 50 to be troublesome.
For the time being, the only “victim” of Einhorn’s was AthenaHealth (ATHN) , who just prior to the end of the trading day had dropped 14.34 percent to hit $108.60 a share.
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