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| Subject: Tech stocks around the world are currently trading at an average 30 to 35 times next year's earnings per share | |
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Author: AMSTERDAM, Jan 27 (Reuters) |
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Date Posted: Thursday, January 29, 08:37:11am Topic: Motorola, Inc (MOT) Keep it germane! Off-topic posts go here. < By Lucas van Grinsven, European Technology Correspondent AMSTERDAM, Jan 27 (Reuters) - Investors once paid for tech stocks priced on little more than mouse clicks, but despite the salutary lesson when technology boom turned to bust three years ago, creative pricing models are making a comeback. Investors have not yet returned to the Internet goldrush days of paying $1,000 or more per subscriber in a loss-making cable operator or cash-burning Internet service provider, but analysts are looking for novel explanations for overheated price-earnings multiples. "What we see happening is that brokers are stretching price earnings multiples by using 2005 earnings, instead of 2004," said Rob Van Oostveen, a technology analyst at ABN Amro Asset Management, which oversees 30 billion euros of investments. Tech stocks around the world are currently trading at an average 30 to 35 times next year's earnings per share, compared with an average 20 for the Standard & Poors average. So some are tempted to use higher 2005 earnings per share, so multiples drop to more reasonable levels below 30. But 2005 is not just another year. "Analysts know that 2005 will be a record earnings year for many tech companies, and that earnings might fall again in 2006. They should be using mid-cycle years," Van Oostveen added. Also back from the past are relative sales multiples. Investors are being told by brokers that a stock is cheap because the shares are valued at three times sales, while it used to trade at five, and its rivals are trading at four. "This market is definitely feeling hot," Van Oostveen said. GROWTH STOCKS? When the going's good, technology companies can increase their revenues, and hence profits, faster than non-growth stocks which closely track the increases in gross domestic product, such as food and energy. But that has not been the story of the last three years. Technology revenues have not risen. In fact, revenues of the main U.S. and European technology companies are still 10 percent below peak levels reached in early 2001, according to merchant bank Merrill Lynch's models. Companies and consumers simply shied away from spending more on technology. Merrill Lynch does not expect fresh record revenues from the sector until mid-2005, in line with the recovering companies' own guidance that average sales growth will be around 10 percent this year. In Europe, Finland's Nokia ((NOK1V.HE)) expects handset market growth of more than 10 percent, and German software maker SAP ((SAPG.DE)) expects 2004 sales growth of 10 percent. In the United States IBM (IBM,Trade) is predicting mid to high single digit revenue growth in 2004, while Microsoft (MSFT,Trade) sees 10.5 to 11.5 percent sales growth in its fiscal year that ends in June. For the first quarter alone, chip behemoth Intel (INTC,Trade) forecasts 10 to 19 percent year-on-year sales growth and Motorola (MOT,Trade) seven to 13 percent. The share prices, however, demand much stronger growth. Tech companies will have to increase their annual profits 12 percentage points faster than the average seven or eight percent that is factored in for non-tech stocks. After the cost cuts of recent years, many companies can squeeze higher margins from their operations compared with the previous peak around 2000. Computer Associates (CA,Trade), Qualcomm, Electronic Arts (ERTS,Trade) and Nokia all have gross margins a little or even well above those in 2000. If sales pick up, profits could rise even faster. But the trick is knowing which technology stocks will continue to grow strongly over coming years, and which will not. Many investors bet that industries with longer cycles, such as software and IT services, will increase sales for many years, because they will benefit from recovering economies. But in the chip sector, this year's flurry of investment will lead to new capacity and price pressure in 2005, which is when earnings will start to slide. "We're now cutting our investments in some chip stocks," an Edinburgh-based investor said. In communications equipment, Nokia, Ericsson, Lucent, Alcatel and Nortel could benefit from rising investments. But unlike some software and chip makers, these companies do not dominate their markets and suffer from ferocious competition, which could continue to hurt profits until they start merging. But it's a little soon to be paying a speculative distant merger premium. [ Next Thread | Previous Thread | Next Message | Previous Message ] |