Tech stocks: time to take your profits?
By
Euan Stuart Oct 31, 2005
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One of the most respected technology analysts around is Fred Hickey, editor of US-based newsletter The High Tech Strategist. He’s been following technology stocks since the late 1970s and knows more about the sector than anyone else. So what does he think of it today? Not much, it seems. “I’ve seen valuations this high only one other time,” he told Barron’s last week. “In 1999 and 2000. It’s hard to believe that after the bubble valuations we saw in 2000 we’re nearly back to the level of insanity of those days.”
He isn’t the only person showing signs of nervousness. Larry Page - one of the co-founders of Google - sold $50m of stock in his own company last week. The bulls point out that this only represents a tiny part of his total holding, but I bet there is more to it than that. Does it really make sense that the shares of this firm - which, although hugely successful, is facing increasingly strong competition - have a market value higher than the combined market value of Ford, Safeway and Kmart? Of course it doesn’t. If I were Page, I’d also be siphoning off some cash while the going’s good. Indeed, it is probably something most investors should be thinking about. If you haven’t checked your own portfolio recently, do so. You may be surprised to see that some of the technology holdings you left for dead five years ago have suddenly come back to life. And even the mad world of internet IPOs is back: the three most successful ones in the US last year (all of which involved internet-based businesses) all saw their shares triple in value.
Sadly, the fundamentals don’t support this splendid bull run. As Philip Coggan points out in the FT, the fourth-quarter results season is still in its early stages, but it is already very clear that the technology sector is the one to worry about. A “downbeat” first-quarter outlook from Qualcomm, the wireless technology group, last week was accompanied by news that eBay, the online auctioneer, missed earnings estimates - all of which followed a lacklustre statement from Motorola, the mobile-phone manufacturer. There has also been a profits warning from consumer-electronics giant Sony. The firm effectively admitted that it cannot make money from the televisions, DVD recorders and other gadgets that are the “lifeblood” of the consumer-electronics industry, says Lex, also in the FT. Sony isn’t alone in this. Pretty much no one - Apple with its iPod and iMacs aside - is making money in consumer electronics.
Yet despite all this evidence that things aren’t quite as they should be in the technology sector (personal computer sales are falling, there is a glut of mobile-phone handsets and order rates for semiconductors are falling across the board, says Hickey), valuations are still high. Even after the long bear market of 2000-2003, many Nasdaq stocks still trade on price-earnings ratios of 35-40, and some on considerably more. Take the case of eBay. Its shares fell 19% in the wake of its disappointing results statement and five Wall Street analysts downgraded their ratings on the stock. Even now it’s very pricey: it has a market capitalisation of $57bn, despite having sales of only $3bn and a p/e of 74 times, in spite of the fact that first-quarter earnings are likely to grow a mere 10%. “The market,” says Fred Hickey, “has only just begun to take the multiple down.” And once eBay, long considered a safe haven in the sector, starts to really fall, many of its overvalued peers will surely follow.
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