[1] Market Valuation: At P/EBIT of 22.4, Internet Infrastructure Stocks trading at a more expensive price compared to 18.6 for S&P 500
Market ValuationInternet Infrastructure StocksS&P 500vs S&P 500As of 1/7/2022 Price To Sales Ratio (P/S)3.718.3CheaperPrice To OpInc Ratio (P/EBIT)22.418.6More ExpensivePrice To Earnings Ratio (PE)28.855.9Cheaper
[2] Growth & Profits: Considering the valuation, the market appears to be rewarding higher profitability of Internet Infrastructure Stocks with less regard to revenue growth - S&P 500: better revenue growth --> 17.2% last Q (qoq), 39.4% last Q (yoy), 26.1% LTM, and 4.5% annually in last 3 FY - In comparison, Internet Infrastructure Stocks: 4.7%, 10.6%, 8.8%, and 2.5% respectively, during the same periods - However, Internet Infrastructure Stocks: greater profit generation promise --> 23% average margin, 7.4% average margin expansion, and 34.5% cash flow - The corresponding values for S&P 500 stand at 15.3%, 4.9%, and 64.2%Note: Average margin is based on average of last Q, LTM, and last 3 FY, while margin change is based on last Q margin vs 3Y average
Growth & ProfitInternet Infrastructure StocksS&P 500vs S&P 500 As of 1/7/2022 Revenue GrowthLast Q Growth (QoQ)4.7%17.3%Growing SlowerLast Q Growth (YoY)10.6%39.4%Growing SlowerLTM Growth8.8%26.1%Growing SlowerLast 3 Fiscal Year CAGR2.5%4.5%Growing Slower ProfitabilityLast Q OpInc Margin26.7%19%More ProfitableLTM OpInc Margin22.9%12.8%More ProfitableLast 3 Fiscal Year Average19.3%14.1%More ProfitableLTM FCF Margin34.5%64.2%Lower Cash Flow %
[3] Financial Risk: Also, is the market is assigning more risk to S&P 500? Likely as there is apparent higher risk for S&P 500 vs Internet Infrastructure Stocks - Internet Infrastructure Stocks: better debt position, with debt as % of equity of 8.7% vs 19% for S&P 500 - Internet Infrastructure Stocks: more cash cushion, with cash as % of assets of 22% vs 11% for S&P 500
Financial RiskInternet Infrastructure StocksS&P 500vs S&P 500 As of 1/7/2022Debt as % of Equity8.7%19%Lower Debt LoadCash as % of Assets22%11%Better Cash Position
[4] Market Returns: What about market returns of Internet Infrastructure Stocks vs S&P 500? - S&P 500: higher average annualized return of 0% vs 10% for Internet Infrastructure Stocks based on key market periods - These key market periods include, year-to-date, pre-covid to now, and 1, 2, and 3 years prior to covid
Precovid date is taken as end of Feb 2020
Notes:
[1] Q = quarter, LTM = last twelve months, FY = fiscal years, yoy = year-on-year, qoq = quarter-on-quarter
[2] Revenue growth decision is made by giving more weightage to long-term revenue growth (3-year average) and lesser weightage to quarterly growths
[3] Margin mentioned is average of last Q, LTM, and last 3 FY; margin increase is average of increase in last Q vs LTM and increase in last Q vs 3-FY average