Tech Bubble: Part II?

There are very interesting things going on in the technology sector right now. You can feel the excitement in the air when you mention one of the following stocks to investors:

Google
Amazon.com
Research in Motion (RIMM)
Apple

Amazon.com is at new multi-year highs, trading above $95 a share. The last time they traded that high was in, yes, you guessed it, 2000. It’s near an ALL-TIME high.

I don’t care how “high” a stock trades, as long as its valuation isn’t skewed. We do care about valuation, don’t we?

Amazon.com is trading at 132 times earnings.

It cannot, as we know from the first tech bust, be sustained. So why does the stock keep going higher?

Irrational exuberance. Investors are trading on pure emotion and disregarding the fundamentals.

Apparently, nothing was learned 7 years ago.

What about Google?

Google is making billions, unlike Amazon, and dominates its industry. It also has the ability to increase its margins (unlike Amazon). But the stock has gotten ahead of itself. Its market cap now surpasses that of Wal-Mart. Remember when Cisco briefly had the largest market cap in 1999-2000?

Yes- good times. But it didn’t last.

Google is trading at 45 times earnings. That doesn’t seem altogether pricey for a company that is growing as fast as Google is. But eventually the growth will slow down. As the stock price increases, it will be removed from fundamentals.

According to MSN Money:

If Google were in the Dow, the company would rank eighth in terms of market capitalization among the 30 stocks in the blue-chip index.

Its market cap is nearly as large as the five Dow stocks with the smallest market caps combined: Caterpillar (CAT), DuPont (DD), Honeywell (HON), Alcoa (AA) and General Motors (GM).

Apple “believers”

Lost in the Google excitement is that Apple has also reached an all-time high: trading at over $167 a share or 47 times earnings.

Apple is also in the nosebleed levels. Yet it too continues to just continually go up. Until they got the iPod, the company’s Return on Equity was pathetic. It barely registered. Even in the last two years it hasn’t been spectacular (though it HAS been good.) It’s been over 17 the past two years.

Research in Motion Puts Apple to Shame

How to value Research In Motion? Apparently no one is. Its trading at 92 times earnings. Again, how does anyone expect this to continue? They cannot- yet investors are piling in like there is no tomorrow. 31 million shares traded hands today.

Yes- the company has doubled its profits in the last quarter. They are likely to do so again as the Blackberry moves into China. But at that p/e ratio? That’s, again, nosebleed level.

Are we in a mini-technology bubble here? Or is it just crazy exuberance in a few stocks?

Tech isn’t dominating the way it once did (in 1999) but it was still quite scary to see “Google Passes $600″ on the front page of USAToday’s website. The “Google story” is dominating the news. You don’t see the media talking about the Chicago Mercantile Exchange and those great gains. (CME is also an expensive stock right now however.)

The herd is moving quickly into the tech names. The chatboards are active. Everyone is excited.

You can feel the greed.

Check out Eric Savatz’s great article in Barron’s called “Danger Signs: True Believers are getting more Fervent”. He lays out the greed pretty clearly. And it’s not pretty. From the article:

Henry Blodget is back, writing in a blog post that you can easily argue Google eventually will trade for $2,000 a share, which would give it a stock-market value of $750 billion — 50% more than ExxonMobil’s. This is familiar territory for Blodget, who first came into the spotlight with his famous bubble-era prediction that Amazon.com could hit $400, a price it promptly passed, if only temporarily.

Even more alarming: Not long after I wrote about Blodget’s call on my blog, I heard from two other people complaining I hadn’t highlighted previous outsized predictions for Google’s stock; they apparently want some of the credit Blodget now surely will get if it ever gets that high.

What really has me edgy, however, is the tone of the reader commentary on my blog, Tech Trader Daily. The comments lately are almost uniformly bullish; but bullish doesn’t begin to describe the supreme self-confidence, the absolute self-righteousness, that is seeping into the chatter. For a growing number of stocks, even a mildly negative word brings a torrent of attacks, which typically assert that I’m a short-seller, pump-and-dumper and stock manipulator who should be fired and tossed in the pokey.

Any time Henry Blodgett is again making predictions on a stock- I’m running the other way.

Don’t get sucked into the herd! Think contrarian. There are plenty of ways to make money in this market.