Battered Tech Darlings May Soon Be Cheap Enough

By Reuters -  |  Posted 2008-01-24

NEW YORK (Reuters) - The sexiest names in technology have been hit hard in a U.S. stock sell-off, but some investors are already betting on a comeback while others are sticking with the sector but switching to other stocks.

Fund managers and analysts say widespread fears over the effects of a U.S. recession have knocked out most of the "momentum money" that propelled the four big names in tech investing in 2007 — Google Inc, Apple Inc , Inc and Research In Motion Ltd. 

In the first few weeks of 2008, their valuations have been dragged down to much more appetizing levels, leaving some to argue that it will be worth getting back into these stocks by the second quarter of the year.

"The volatility is going down right now, and once the current uncertainty plays out, it's opening up a fabulous buying opportunity," said Jeffrey Lindsay of Sanford C. Bernstein.

Google, Amazon and RIM have lost about 19 percent of their market value each since the start of the year, while Apple shares have shed nearly 30 percent. The Standard & Poor's 500 Index has dropped about 8 percent in that time.

The declines reverse some of the steep price increases seen in the last half of 2007, when investors viewed technology as a safer bet than a financial services sector grappling with the fallout from a subprime mortgage crisis.

"Technology has been thrown out with everything right now," said Keith Wirtz, president and chief investment officer at Fifth Third Asset Management, which manages $22.5 billion. "They've gotten cheap again and I still think the core fundamentals look very attractive."

Apple, for example, trades at a multiple of about 22 times fiscal 2008 earnings, according to Reuters Estimates, which some say is low compared with its growth projections.

Fears that consumers will be less likely to buy sleek iPods or iPhones have weighed on the shares, but Wirtz sees it as a no-brainer that the quality of Apple's brand will keep it growing by 20 percent or more in the next two to three years.

Wirtz's fund holds shares in all four companies and added to positions in Apple and RIM on Wednesday.

"If you were concerned about valuation three days ago, that valuation concern has been taken out of the stock," Wirtz said of Apple, shares of which slid on a weak earnings forecast.

Longer-term value investors, however, prefer some of the oldest technology names.

"I didn't think they were good in 2007," said Kim Caughey, senior analyst at Fort Pitt Capital, referring to Google, Apple, Amazon and RIM. "I don't think they're good values at this point even in their current state."

Caughey said she favors industry stalwarts like International Business Machines Corp and Oracle Corp due to their scale, diversity of operations and overseas strength. IBM trades at about 12 times 2008 earnings, Oracle at 14 times fiscal 2009 earnings and Microsoft Corp at about 15 times fiscal 2009 profits. 


Stifel Nicolaus analyst Scott Devitt said Apple and Google had become standard-bearers for the sector, making them the last shares vulnerable to a market correction.

The fact they have already lost so much more ground than the wider market "would actually suggest to me we're close to the end of a bottoming out," Devitt said.

Google, trading at 26 times 2008 earnings, is still viewed by many on Wall Street as the best-placed Internet company to ride out a recession, since its paid search listings give advertisers a more efficient way of tracking marketing budgets.

But Standard & Poor's analyst Scott Kessler said the company, which went public in 2004, is too reliant on advertising as its nearly sole source of revenue and is an unknown quantity when it comes to economic woes.

"Google as a public company has never faced an economic slowdown," he said. "As much as they want to talk about how Google is much more akin to a direct sales model ... this can't be good for them in our judgment."

RIM, trading at about 26 times fiscal 2009 earnings, faces concerns similar to Apple's. It is at the start of trying to penetrate a broad consumer market, and the popularity of its BlackBerry email device and phone among business customers could be hit as U.S. companies cut back spending.

But some focus on the fact that the global appetite for advanced phones is expanding, and RIM may be quicker to gain than others.

"There is clearly some risk ... but the growth trajectory will still be one of the best available to investors in the large-cap tech space," said Paul Coster of JP Morgan.

Amazon, still rich at a multiple of 47 times 2008 earnings, may be the most vulnerable of the four and could eventually cede investor attention to online auction site eBay Inc, which has lost 33 percent of its value on growth concerns since reaching a high point of more than $40 in October.

EBay Chief Executive Meg Whitman, who plans to step down in March, has said the company's online auction has been an attraction for bargain-hunting consumers in past downturns.

Bernstein this week upgraded its view of the U.S. retail sector to "overweight," saying a recession's potential effect on consumers had already been priced into these stocks.

"That's a rising tide that will also benefit Amazon and eBay," Lindsay said. 

Devitt also has a positive view on eBay, as well as on Liberty Media Corp's Liberty Interactive with a trading multiple at 6 times earnings before interest, taxes, depreciation and amortization (EBITDA), and on IAC/InterActiveCorp at 6.5 times EBITDA.

"These valuations, unless you anticipate earnings are going to fall off a cliff in 2008, are very reasonable," he said.

(Additional reporting by Jennifer Ablan, editing by Gerald E. McCormick)

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