When I used to play poker at Casino M8TRIX in San Jose before I moved to Davis, there was a dealer named Errol who liked to trade stocks using technical analysis. One of the stocks that he was bullish on for a long time was Synopsys (SNPS). I looked into it and I liked what I saw. SNPS is an $80 billion company that makes software used for the Internet of Things – a secular trend I believe will continue.But the problem was always valuation. SNPS kept going up – but it was always trading around 40x current year EPS guidance. SNPS reported 3Q24 earnings Wednesday afternoon. Revenue was +11.5% and EPS +13.3%. Fine numbers – but not enough growth given SNPS’s valuation IMO. SNPS is taking a bath today with the stock down 11%. But it’s still trading for 35x the midpoint of its FY25 EPS guidance. As much as I’m intrigued by the stock, I can’t justify paying that multiple.The same thing applies to Salesforce (CRM) which reported earnings Tuesday afternoon. Clearly this is a great company with the leading customer relationship management software. But – once again – the stock is just too expensive. The stock is trading at 36x its FY25 EPS guidance while guiding to only 8-9% revenue growth.CRM has a new AI platform called Agentforce that investors are excited about. But it’s not yet a material contributor to the business. Analysts like Mark Moerdler of Bernstein and Gil Luria of D.A. Davidson made the same point in their notes on CRM’s report (see Dan Gallagher “Salesforce’s AI Payoff Clock Starts Running”, WSJ, Thu 12/5).
The market has a lot of momentum and animal spirits at the moment with Bitcoin breaking through $100,000 and The Fed expected to cut rates by a quarter of a point in two weeks. It seems likely to keep rallying through year end. But there may be a day of reckoning at the beginning 2025.More By This Author:BBY & DKS: A Tale Of Two Retailers
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