Tech bubble just talk — for now

But technology stocks could fall just as hard, or harder, than the S&P 500 in a broad market downturn

Aug 24, 2017 @ 6:18 pm

By John Waggoner

Ever since the dot-com bubble burst in 2000, investors have been wary of another tech wreck. And some analysts, worried about some of this year's tech rockets, are saying tech is looking bubbly again. But — at least for now — tech isn't looking terribly bubbly.

True, the technology sector of the Standard & Poor's 500 stock index has been soaring. Tech stocks have soared 22% this year, according to Morningstar Inc., versus 10.6% for the S&P 500. And some tech stocks have strapped on booster engines: Apple is up 38.1%, Facebook has posted a 46% gain, and Nvidia has shown a 55.3% gain. (S&P classifies Amazon, another tech darling, as a consumer discretionary stock. It has shipped investors a 37.3% gain).

But bubbles typically denote a market that has left valuations far in the distance, said Dave Gedeon, head of index research and development at Nasdaq. That was the hallmark of the dot-com bubble. "You saw massive P/E expansion, with companies that were not profitable with massive market caps," he said.

At least at this point, P/E ratios haven't gone to the sky. "Back in early 2000, the S&P 500 tech sector was trading at 65 times trailing operating earnings," said Sam Stovall, chief market strategist for CFRA. "Today that number is 20x trailing earnings — less than a third of where it was then." Tech isn't even the most expensive sector, Mr. Stovall said. That distinction goes to the energy sector — not because prices are high, but because earnings are so low.

And, in fact, technology P/Es have been declining since 2003, said Mr. Gedeon. "It's the complete opposite of 2000. We're seeing companies expand their market caps by growing their top and bottom lines." Tech companies are also doing something unusual by 2000 standards: They are keeping big cash hoards and doling out dividends to shareholders. Companies like Apple and Microsoft have Brobdingnagian cash stashes. And currently, 47 tech companies out of 68 pay dividends, according to S&P.

And, unlike the dot-com bubble, tech companies aren't concentrated on the internet. "These companies are so imprinted in the economy. Tech today is hardware, software and efficiency-driven," Mr. Gedeon said. "What we have today are modern industrial companies integrated with every aspect of our lives." One example: Tesla, the car company that's massively disrupting the auto industry.

And, of course, you probably won't be warned about the next stock bubble on the front page of the newspaper. "It's very hard to call the specific top of the bubble," Mr. Gedeon said. "You heard people calling tech a bubble in 2013, 2014, 2015 — just about every year. The short sellers called it over and over."

All of which isn't to say that there aren't pockets of craziness in the industry. So-called unicorn companies, which have seen vast inflows of private capital, worry some observers. And if the broad market falls, technology is likely to fall just as hard, or harder, than the S&P 500.


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