Tech Bubble or Just Hot Air? You Be the Judge…

by Alexander Green, Investment U’s Chief Investment Strategist
Monday, June 13, 2011: Issue #1533

There’s a lot of talk on the Street right now about a new “bubble” in tech stocks.

If you’re talking about social network stocks, this may be true. Is there anyone out there who hasn’t heard how LinkedIn (NYSE: LNKD) doubled right out of the gate after its IPO last month?

But this euphoria has hardly spread to the rest of the sector. The Nasdaq is no higher than it was at the beginning of the year. And while many of our recommended tech stocks are soaring, there’s no tulip-bulb mania like the one that took place in late 1999 and early 2000. Solid fundamentals undergird the current tech rally.

That was not the case in the last real tech bubble – one we called “the greatest investment mania of our lifetimes and perhaps of all time.”

Eleven years ago, the Nasdaq hit an all-time high of 5,048. Valuations hit nosebleed levels. Many tech stocks sold for more than 100 times earnings. Others didn’t even have a multiple. After all, you can’t calculate a P/E if you don’t have an E (earnings)…

Things are different today. For starters, the Nasdaq Index, more than a decade on, trades at less than 60 percent of its March 2000 high.

Sales and earnings are solid and rising.
Valuations are reasonable.

Key Indicators That Tech Stocks Remain Promising

And the outlook for tech companies remains promising. Here are just a few key indicators:

Profit margins at U.S. technology companies are near record highs.

Chipmakers – who saw sales rise 28 percent in 2010 – are seeing stronger demand for consumer items and businesses are finally making purchases that were delayed in the recession.

Respected research firm, Gartner, reports that sales of server systems are climbing, a sign that large technology firms are spending again on big tech projects. (Sales of server systems generally precede spending on other technology products, such as storage systems and software.)

There’s plenty of fuel for merger and acquisition activity. U.S. corporations are currently sitting on nearly $2 trillion in cash.

The Fed’s Beige Book reports that manufacturers of high-tech products are operating near maximum capacity of late.

Due in part to record demand in Asia and Latin America, the market for mobile devices such as handsets and media players is expected to top two billion this year.

International Data Corporation (IDC) estimates that worldwide IT spending will top $1.5 trillion in 2011, with spending on PCs, servers, and storage and networking gear expected to soar.

Global capital spending on wireless infrastructure will rise dramatically as carriers in the developed world start deploying next-generation 4G networks.

The Telecommunications Industry Association (TIA) reports that broadband stimulus funds will contribute to double-digit growth in backbone infrastructure spending this year and next.

Investing in Technology – A Smart Business Move

With the economic recovery weak and consumer spending soft, most businesses aren’t willing to hire in a big way right now or commit funds to major building projects. But they’re eager to cut costs in order to maintain or increase corporate profits.

That makes investing in technology a smart business move. And that, in turn, indicates that business for many tech firms will keep rising in the months ahead.

Right now we’re sitting on more than a dozen double- and triple-digit gains on the tech stocks in our paid advisory portfolios.

Outside of social networks, we see no tech bubble. Quite the opposite, in fact. Leading technology firms should see rising sales, earnings and share price appreciation in the months ahead. In our view, the best is yet to come.

Good investing,

Alexander Green