Is Tech Worth What the Markets Are Paying?

by Ryan Cole

Is Tech Worth What the Markets Are Paying?

by Ryan Cole, Investment U Research

Friday, August 12, 2011

For a brief moment Tuesday, Apple was the largest company in the world.

Exxon erased earlier losses and retook the lead, but this gives us a chance to ask the question: Is the tech sector in a bubble, or is it coming into its own as the most important industry around?

Let’s take a look at the numbers – we’ll compare them to the energy sector, one of the most dominant on Wall Street.

Tech Industry Capitalization

Using the judgment of the market, the tech industry is every bit as important as energy. Apple and Exxon are nearly identical in size – but it doesn’t stop there.

  • Microsoft (Nasdaq: MSFT) and IBM (NYSE: IBM) are both bigger than Royal Dutch Shell (NYSE: RDS-A).

  • Google (Nasdaq: GOOG) is the same size as Chevron (NYSE: CVX), and larger than BP (NYSE: BP) and Petrobras (NYSE: PBR).

  • Even Oracle (Nasdaq: ORCL) – tiny by tech standards – is larger than BP.

This is partially because the drop in oil prices hit energy stocks hard, while tech stocks stayed surprisingly strong during the downturn in terms of share price and sales.

Still, there’s little doubt – the market sees tech as every bit the equal of oil, at least in terms of profitability.

Energy Giants Are Second Tier to Tech Earnings

The energy giants have great earnings – BP brings in $6.33 earnings per share (EPS). Petrobras is strong, with $3.94 EPS, but it’s easily overshadowed by Shell ($8.96), Exxon ($7.61) and Chevron (an astounding $11.45).

As envious as most companies would be of such strong earnings, the energy giants would be second tier to tech.

Oracle ($1.66) and Microsoft ($2.70) are the laggards. But IBM would beat every oil company around by EPS, pulling in $12.28. And Google and Apple, which pull in $27.73 and $25.26, more than double it.

Part of that’s because Google and Apple have been loath to issue new stock or split, and thus are some of the most expensive companies in the market on a per-share basis. Nonetheless, such earnings are astounding.

And it’s not just a mirage. Apple had nearly $12 billion in gross profits last quarter – off $28.5 billion in sales. That’s a 125-percent increase from a year ago.

Google pulled in a “measly” $9 billion in sales, with $5.5 billion in gross profit.

Those numbers pale in comparison to the oil giants – Chevron had $21 billion in gross profit last quarter, and Exxon made over $33 billion – but the energy companies would be envious of tech’s growth.

Meanwhile, oil giants tend to have low P/E ratios – the highest amongst companies mentioned is Exxon, with a P/E of 9.41.

Tech companies tend to have high P/Es – Google is over 20, while Oracle is nearly 17.

But Apple is 14.81, IBM is 13.90 and Microsoft is 9.47 – nearly identical to Exxon.

In other words – even though tech P/Es are traditionally high – they aren’t really all that crazy today.

That could be because tech is maturing as a sector, and the record-breaking growth seen earlier is a thing of the past. Microsoft – one of the more venerable tech companies, and arguably the most mature – has been behaving more like a blue chip, and less like a tech start-up, for years.

Google and Apple, meanwhile, have continued growing fast enough that investors are willing to pay a premium for them.

Tech Giants Best Value on Wall Street

When talking about the big players, there’s no doubt: The tech sector is the real thing. Valuations are justified – there’s no sign of a bubble. Indeed, it’s easy to make the case that the tech giants are some of the best values on Wall Street today.

Newer companies – like LinkedIn with its astronomical IPO – are another matter. We’ll deal with them later.

But for now, know this: You can feel entirely comfortable putting your money to work with the tech giants. In fact, with the business proving so recession-proof, with reasonable P/Es and with huge piggy banks (Apple could buy Bank of America outright today, and have cash left over) the tech industry might be the best place to put your money.

Good investing,

Ryan Cole

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