There’s been a lot of excitement surrounding the young, high-growth, highly-speculative biotech and internet stocks.
Just last week, we witnessed Puma Biotechnology surge 300% in an instant on news of a breast cancer drug breakthrough. Gilead Sciences stunned investors when it revealed it had sold a whopping $US3.5 billion worth of its hepatitis-C “wonder drug” in one quarter.
And just today, online realtor site Zillow announced it would buy out competitor Trulia for $US3.5 billion.
But with stock prices surging everywhere, some sceptics are warning we’re marching into another biotech and dotcom bubble. Even Federal Reserve Chair Janet Yellen has warned that valuation metrics in these sectors “appear substantially stretched.”
However, RBC Capital Markets’ Jonathan Golub takes issue with such sweeping statements. In fact, Golub thinks they may actually be worth buying.
“In our view, the biotech and internet industries appear attractive for a variety of reasons,” wrote Golub on Friday.
Among his reasons, “valuations attractive relative to growth prospects” and “the current environment bears little resemblance to the tech bubble.”
Both reasons relate to investors expectations for the future. And in both cases, Golub considers the price-earnings (P/E) ratio, which reflects the premiums investors pay for future earnings.
“Multiples for biotech, internet, and even the broader market are much more reasonable today,” he said pointing to Exhibit 2.
Are biotech and internet stocks expensive today? That’s hard to say. But they’re certainly nowhere near the crazy levels of the bubble era of just 15 years ago.