Mad Money

Cramer: If you think tech stocks are way too expensive, you're wrong

Key Points
  • "Mad Money" host Jim Cramer explained why technology stocks like Alphabet and Facebook are so difficult to accurately value.
  • There's no easy way to compare all stocks apples-to-apples, Cramer said.
  • But even though tech stocks are hard to value, it doesn't mean that they're too expensive yet, the "Mad Money" host argued.
You're wrong if you think tech stocks are too expensive
You're wrong if you think tech stocks are too expensive

CNBC's Jim Cramer knows how hard it is to compare stocks using their individual valuations.

The only tools investors really have to value a stock are the given company's total addressable market and its price-to-earnings multiple, or the share price relative to the earnings per share.

"In the end, valuing stocks is either totally straightforward or totally mystifying — one or the other," the "Mad Money" host said. "For a certain group of stocks, it's much more of an art than a science."

For example, investors trying to pin down the value of Netflix will run into trouble because the streaming giant barely has any earnings, Cramer said.

"You're hostage to the total addressable market, or TAM, for internet entertainment around the world," he explained. "Without that kind of thinking, no one would ever believe it was reasonable for Netflix the company to be worth almost four times as much as CBS."

Valuing Amazon is just as tricky. Cramer thinks Amazon's retail and cloud businesses could be worth $750 billion and $250 billion respectively, which would mean the $1,140 stock could still double.

If investors considered that possibility, the recent technology stock sell-off would make shares of Amazon seem like a bargain over the long term.

How about Tesla? It's no secret that Cramer thinks the automaker's value is entirely in the eye of the beholder considering its lack of earnings, shoddy projections and star power of its CEO, Elon Musk.

But for those who view Tesla as a tech stock and not an auto stock, the $303 share price seems reasonable, Cramer said.

To prove his point, Cramer pointed to the valuations of respected consumer goods stocks like Colgate and Clorox. Colgate has a 7 percent growth rate and a 24 times price-to-earnings multiple; Clorox also trades at 24 times next year's earnings and has a growth rate of 5 percent.

"We all accept these valuations in the consumer packaged goods space despite uninspiring growth rates and now-meager dividends," Cramer said. "It's stereotyping, plain and simple."

Meanwhile, stocks like Apple, Alphabet and Facebook are viewed as too expensive despite having larger addressable markets and faster growth than the consumer goods names, he said.

Apple's growth rate, for one, could go as high as 25 percent by some estimates. Still, the tech stock has a price-to-earnings multiple of 14, a huge discount to the consumer goods names.

Similarly, analysts put Facebook's growth rate at 21 percent with a 21 times price-to-earnings estimate for 2019. Alphabet has a 17 percent growth rate and sells at 24 times 2018 earnings estimates.

All of this tells Cramer one thing: that the stocks he likes and owns for his charitable trust are cheaper, on a price-to-earnings basis, than household consumer goods names.

"People love to claim that Facebook or Alphabet or Apple have gotten so expensive that you can't possibly own them, but when you actually do the exercises I do and you get all arithmetic ... you don't get that conclusion," Cramer said. "Yep, tech's much cheaper than you think. It just doesn't usually get explained in comparison to what's really expensive that we all hold so dear."

WATCH: Cramer's take on valuing tech stocks

Cramer: If you think tech stocks are way too expensive, you're wrong
Cramer: If you think tech stocks are way too expensive, you're wrong

Disclosure: Cramer's charitable trust owns shares of Apple, Alphabet and Facebook.

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