Some people think things are getting a bit frothy in the tech world. And, in some ways, the concern about a new tech bubble is understandable.
Some people think things are getting a bit frothy in the tech world.
Articles are popping up all over the mainstream media speculating about the "new tech bubble" and fretting about when it might "burst."
And in some ways, the concern is understandable. I just came back from a week in Northern California, the center of the technology world. And let me tell you, it's getting nuts there again.
• A friend's 950-square-foot, one-bedroom apartment in San Francisco is selling for $1 million.
• There is such a scarcity of talent that companies are throwing bags of money at recruits, including kids right out of school with no experience. In some cases, they're being hired even though there isn't a defined job for them.
• Tech companies now routinely have gourmet cafeterias with experienced chefs on their campuses. Massage therapists, chiropractors, and free snacks are other regular perks.
In fact, I was mentioning to a tech veteran that another friend goes to the dentist right at his company's headquarters.
"Well, that's normal," she said.
I pointed out that it may be "normal" in Silicon Valley, but it's hardly normal in the real world.
This seeming departure from reality in California does remind me a bit of the dot-com bubble in 1999. But I would argue it's not quite as extreme.
I haven't heard of companies throwing huge bashes with superstar entertainment simply because they raised a round of funding. And no one is quitting their jobs to trade technology stocks.
And when you look at the market, despite the 5-year bull run, the valuation of tech stocks is actually quite reasonable.
Since 2000, the Philadelphia Semiconductor Index (Nasdaq: SOX) has traded at an average price-to-earnings ratio (P/E) of 26. The median is 27. Today, it stands at 19, the third-lowest P/E in 15 years. The index is comprised of stocks like Altera (Nasdaq: ALTR), Avago Technologies (Nasdaq: AVGO), and Micron Technology (Nasdaq: MU).
The NYSE ARCA Networking Index (NYSE: NWX) features stocks like Cisco Systems (Nasdaq: CSCO) and Juniper Networks (NYSE: JNPR). It historically has traded at an average P/E of 47 and a median of 36. Today, it's at 41, below the average.
Even the internet stocks — despite so much hype around Twitter (NYSE: TWTR), Facebook (Nasdaq: FB), LinkedIn (NYSE: LNKD) and the like — are not expensive by historical standards.
The Nasdaq Internet Index (Nasdaq: QNET) has a current P/E of 23. True, that index has been around only since 2009, but compared to the (now-defunct) Interactive Week Internet Index, where the average P/E was 36 and the median was 32 (not including a single outlier year of 2009), you can see that today's internet stocks are not expensive in historical terms.
Despite the fact that overpaid tech workers dine on superbly prepared grilled tri-tip with avocado sauce, then, after their 60-minute Swedish massage, go home to their million-dollar miniature apartments, the stocks of tech companies are hardly in a bubble.
It doesn't mean they can't correct. But whenever a doomsdayer starts screaming "bubble," it makes sense to look at the numbers to see if we actually are in one.
It turns out we're not. Not even close.
Marc Lichtenfeld is the chief income strategist at Investment U. See more articles by Marc here.
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