A Tale of Two Tech Sectors: 2000 and Now

PHOTO: Is another tech bubble forming just like in 2000?

Events in the technology stock sector in the past couple of years have prompted no small degree of alarm among some market observers and pundits.

Their level of concern is so high that they’re using the b-word — yes, bubble. They say signs of a bubble include Facebook’s short-term share-price debacle after going public and the current performance of Twitter. Yet reports of a current tech bubble are greatly exaggerated.

The reality of the sector’s past and present can be viewed as a tale of two tech sectors — the 1990s bubble, which popped with public investor pain in 2000, and tech today. Once bitten and now shy, those who suffered pain in 2000 fear a repeat. But consider the differences between then and now.

The investor mania for tech companies in the 1990s was an amazing phenomenon. Seeking to profit from the market’s obsession with all things digital, venture capitalists pumped obscene amounts of cash into fledgling companies that went public with no revenue, and investors were only too happy to bid up the shares.

The poster child for these companies was Pets.com, which sold pet food and wares to the masses over the Internet. Never mind that shipping costs on your Great Dane’s 100-pound bag of chow would erase discounts, and that people tend to buy dog food in a rush when Fido’s larder runs out. Ten months after its IPO, Pets.com was out of business. The company had been buoyed above reality by credulous investors at a time when the market was going gaga over just about any company with dot-com in its name.

Today, tech companies have something Pets.com and its ilk didn’t: real sales. How much do you have to pay for a company’s sales? The best yardstick for measuring this is the price-to-sales ratio (P/S)—the price per share over sales per share during the last 12 months. The lower a company’s P/S, the higher its sales are relative to its price. This metric is superior to price/earnings ratio because, unlike the P/E, it can’t be manipulated with creative accounting.

Qualcomm, Apple and Intel are tech workhorses with great sales. These are tech companies that new ones should be generally judged against. Apple and Intel have a P/S of about 3, and Qualcomm, whose chips you’re probably using 20 times a day, has a P/S of about 5.

Twitter’s P/S is 28 (it topped 50 in February), which has prompted some to jump to the conclusion that Twitter is evidence of a bubble. Relative to many other tech companies, Twitter is expensive, but it’s hardly bubbleseque.

A bubble is when investors consistently over-pay in anticipation of continued price growth that isn’t justified by financial fundamentals and likely market demand for products. Twitter’s sales are increasing and show every sign of continuing to grow. Investors’ confidence that this will happen is priced into the stock.

Whatever price you’re paying for sales, if you’re paying a lot, a company’s sales had better be on an upward trajectory. When you see this growth dip, you want to be nimble and get out quickly.

The bubble worriers also obsess over Facebook’s rocky IPO. Just before Facebook went public with shares priced in the $30-plus range, critics questioned how the company would make money. These skeptics believed that the market was catching up to their view when the share price tanked down to the teens. But the company’s shares are now trading above $60, even though its P/S is about 19, because the market sees continuing sales.

  • 1
  • |
  • 2
Join the Discussion
blog comments powered by Disqus
You Might Also Like...