With the third-quarter-earnings season in full swing, financial advisers and analysts are finding similarities between this technology boom and the previous one — and they can't help but wonder if another bust is on the horizon.
"There are some similarities to 1998," said Richard Behler, senior portfolio manager at Chartwell Investment Partners LP of Berwyn, Pa.
Large tech companies, such as Google Inc. of Mountain View, Calif., are now major holdings in certain funds.
"Google dominates online search, as eBay [Inc. of San Jose, Calif.] dominates online auctions," said Mark W. Oelschlager, a certified financial analyst and portfolio manager at The Oak Associates Funds of Kansas City, Mo. He added that the tech sector still offers "the most opportunities."
However, some analysts remain cautious, as tech company earnings come out and produce stock price swings.
For instance, Baidu.com Inc., a Beijing-based search engine, opened at $347.07 Oct. 11, jumped to a record $359.45, then plummeted to $301.25, closing that day at $308.73 on news that JPMorgan Chase & Co. of New York cut its third-quarter-earnings estimate.
But short-term volatility isn't the only worry for advisers.
Mr. Behler said that he is concerned about broader macroeconomic issues. He said that the recent effort by the Department of the Treasury to create an $80 billion bank fund to support the commercial-paper market echoes the 1998 bailout of Long-Term Capital Management LP of Greenwich, Conn., by the Federal Reserve and a group of investment banks.
"In a situation where the federal government is addressing a specific problem, you wonder if it'll go too far helping out and then keep the markets going up as a result," Mr. Behler said.
As a value manager, he worries that rescue efforts — along with record-breaking market activity following the Federal Reserve's decision to cut the federal funds rate — will lead to sky-high stock prices.
"I'm not as concerned about the tech bubble bursting as I'm worried about the bubble blowing off to the upside," Mr. Behler added.
The skyrocketing valuations of tech companies that expect to be the next big thing is another familiar signpost for David Bradshaw, principal analyst at Ovum Ltd. of London. He pointed to Facebook Inc. of Palo Alto, Calif., as an example, citing reports that Google and Microsoft Corp. of Redmond, Wash., are said to be courting a stake in the social-networking website.
Facebook's growing number of users — which Mr. Bradshaw estimates at between 50 million and 100 million — demonstrates that the small company has reached high levels of penetration in English-speaking nations, he said. Still, Facebook has only recently started bringing in revenue, and those numbers haven't been published, he said.
Another example is eBay's $2.6 billion purchase of online telephone service Skype in 2005. The online-auction company last week reported a third-quarter net loss of $936 million, reflecting a charge of $1.4 billion related to Skype, of which $530 million is earmarked to settle obligations from an earn-out agreement.
At the time of the purchase, eBay expected Skype to reach user, revenue and gross-profit targets in 2008 and 2009.
"The previous tech boom was preceded by companies that had ridiculously high multiples of projected earnings but very little or no real earnings," Mr. Bradshaw added. "I fear that's happening again."
Despite signs of overvaluation, managers aren't about to pull back from tech stocks, nor do they recommend that investors shy away just yet.
"I just don't see [a tech bubble] right now," said Mr. Oelschlager, who manages a tech-heavy $79 million fund. "While there seems to be a good amount of optimism about the sector right now, valuations appear reasonable and are nowhere near the levels they reached in early 2000."
Another bubble indicator that doesn't seem present is hot money rushing into subsegments with low barriers to entry, such as social networking.
During a bubble, copycats typically emerge and then implode, said Kevin Kemmerer, senior vice president of the technology group at Safeguard Scientifics Inc., a Wayne, Pa., company that invests in growing tech businesses.
That makes him think that a bubble isn't imminent.
"Tech isn't different from any other industry except that it has wider variants than other categories because of the growth opportunities," Mr. Kemmerer said.
"Sure, a problem could lead to downward movement, but a bubble is not in the cards," he said. "Large-cap is doing well, valuations aren't as extended as they were in 1999, and a downward move won't fall into the same bust category."
Darla Mercado can be reached at [email protected].
