Market Intelligence
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n March 12, 2000, the technology bubble peaked with the NASDAQ Index, which represents the technology sector, at 5,132 vs. 3,050 today. Th e technology bubble was led by the creation and adoption of the Internet for providing information, services and e-commerce. Having co-found a tech start-up (National Internet Service Provider) during the tech boom of 1997-2000, I easily recall the buzz words of new economy, eyeballs, dotcom, free service, massive scale, networking, and most importantly that valuations and profi ts do not matter. Th e tech leaders back thenwere AOL (America Online), EBay, Amazon, Yahoo, Cisco, Nortel, EarthLink, and MySpace.com. During that time, taxi drivers and bartenders were investing in tech stocks and everyone seemed to be an expert on the Internet. Every telecom, cable, and technology company wanted to be associated with the Internet so they could be re-valued signifi cantly higher by investors and in the process make their shareholders and managers wealthy. In the US during 1999, there were 457 initial public off erings (IPOs). Most of the IPOs were tech companies with 117 of these stocks doubling the fi rst day of trading with no foreseeable profi ts.
Given the recent spate of technology/Internet IPOs, and the hype surrounding Facebook’s upcoming IPO, I have been asked many times if this is the start of a new tech bubble. My answer is: we are not in or at the start of a tech bubble. However, I do believe that the technology sector should be a core holding in a diversifi ed portfolio.
Tech Boom Dejavu?
By Anil Tahiliani, CFA, MBA Portfolio Manager, North American Equities
Key Findings from a recent visit to
several San Francisco Tech Companies
Not a New Bubble
Although a number of tech/Internet related companies have gone public in the last year, Table 1 shows how they have performed and their current valuations. It should be noted that historically tech IPOs have been underpriced by underwriters to create a fi rst day trading pop in the stock price. Th is will generate more interest in the stock and future tech IPOs. In addition, majority of IPO stocks are placed with institutions where underwriters typically give their best customers a majority portion of the allotment to create retail demand for the stock.
As shown in Table 1, the average fi rst day gain from the IPO price was 40% compared to a range of 50%-200% during the tech bubble. Not all stocks performed
well since the fi rst day of trading. Th is behaviour is very diff erent from the tech bubble because back then those stocks typically had a steady climb for a couple of years after the IPO. Although current 2012 and 2013 price to earnings valuations are trading high at 80X and 40X relative to existing mature tech companies at 8-20X, they are still lower than the 100-250X during the tech bubble, with a majority of companies not forecasting profi ts for years. Th ere is a lot of media hype about technology and how well tech stocks have performed in the last year. However, based on the recent new issue stock performance and valuation data, it would be diffi cult to argue that we are in another tech bubble.
Technology as a Core Holding
Technology today is more ingrained into our everyday
Company Service Current Market Cap. IPO Date IPO Price First Day Close First Day % Gain March 9, 2012 Price Gain from IPO Gain from First Day Close 2012 Forward P/E 2013 Forward P/E
Demand Media Online Content Site $623M Mar 2011 17 20.75 22% 7.48 -56% -64% 25 19
LinkedIn Professional Networking $8.9B May 2011 45 94.25 109% 90 100% -5% 143 76
Pandora Media Online Radio Service $1.8B June 2011 16 17.42 9% 11.5 -28% -34% NA NA
Zillow Online Real Estate Info $822M July 2011 20 35.77 79% 29.85 49% -17% 98 44
Angie’s List Online Review of Local Service Providers $882M Nov 2011 13 16.25 25% 15.5 19% -5% NA NA
Groupon Daily Deals $11B Nov 2011 20 26 30% 17 -15% -35% 81 22
Jive Software Social Business Network $1.4B Dec 2011 12 15 25% 23 92% 53% NA NA
! " # $ % & ' ( ) $ & * + , - , -. / 0 1 2 3 4 5 3 67 3 8 2 94 : 7 98
professional and personal lives than ever before. Th e global adoption of PCs and mobile phones over the last decade has led to the Internet renaissance that will likely last for the next several years. As technology is more adopted, its cost to the masses has declined rapidly spurring further adoption, and innovation. Th e adoption of smartphones, and tablets is still in its early stages of growth. It will grow exponentially as prices decline, and Internet applications increase. In addition for businesses, the “new normal” of slow global economic growth means reinvesting in technology to improve productivity and profi ts rather than headcount. Global businesses today are increasing technology spending through software, hardware, communication systems, and services. Gartner Research recently predicted that global technology spending in 2012 would increase by 3.7% to $3.8 trillion and expects annual spending increases of 5% per year to 2015. Meanwhile, Morgan Stanley’s recent survey of US based Chief Information Offi cers predict US technology spending will increase 2.7% in 2012.
Current Technology Th emes
Convergence - Ownership of content (entertainment)
and the ability to distribute to the end consumer is increasing in value.
Mobile Devices - Smartphone and tablet adoption is growing exponentially in the developed world and as prices continue to fall, the developing world is likely to participate with over 4 billion new potential customers. Speed of Delivery - Faster Internet download times through 4G and long-term evolution technologies is increasing the demand for applications and content. Cloud Computing - Delivery of software as a service rather than a product is being driven for the need to access applications remotely through smartphones, tablets, notebooks, laptops, and work and home PCs. As a result, demand for technology infrastructure such as servers, virtualization software, and data centres is growing rapidly.
Upcoming Technology Th emes
Connected Car - Automobiles will be able to interact and transmit data to mobile devices regarding service problems and updates. Internet access will be integrated with the auto entertainment system through voice command functions and the ability to connect with home applications.
Connected Home - Multiple home appliances and systems (entertainment, thermostat, security, lighting, etc.) will be interconnected and controlled by mobile devices (smartphone/tablet/PC/auto) remotely. TV Everywhere - 24/7 live and delayed programming will be available through mobile devices through one or two main distribution platforms rather than the scattered Internet platforms (NetFlix, Hulu, and various media sites) today.
Large market capitalization technology stocks are very attractive today based on lower volatility (beta), attractive valuations relative to the market, and strong balance sheets with a lot of cash. As shown in Figure 1, large capitalization technology companies have lower beta.
Figure 1: Th ere Are Fewer High Beta Technology Stocks Today than Any Time in the Last 40 Years
In addition, the technology sector has the same beta as the industrial sector with lower valuation (as seen in Figure 2 and 3).
Figure 2: Technology and Industrials Have the Same Beta…
Figure 3: Technology Is Still Cheap Relative to Industrials
Today large capitalization technology companies are trading in line with other large capitalization companies, which rarely happens (as seen in Figure 4).
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opinions expressed herein are those of the author and do not necessarily represent those of McLean & Partners Wealth Management Ltd. Th e information contained in this report has been obtained from sources believed to be reliable, however, we cannot represent that it is accurate
or complete. McLean & Partners Wealth Management Ltd. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.
At McLean & Partners, we believe that technology is a main theme for 2012. Th erefore, we continue to overweight the technology sector in our pools based on technology trends and valuations. Year-to-date, our pools are outperforming the market by over 50%--our Global Balanced Pool is up 6.6%, our Global Dividend Pool is up 10.8%, and our International Equities Pool is up 13.3%.
If you are interested in discussing how to incorporate technology into your portfolio, we extend an invitation to you to consult with one of our Portfolio Managers, at no obligation. We would be happy to assist you at 403-234-6118 or ctsang@mcleanpartners.com. Figure 4: Mega-Cap Technology Stocks Trade In-Line with
Other Mega Caps, Which Rarely Happens
In addition, technology companies have the highest share of cash balances (as seen in Figure 5).
Figure 5: Technology Accounts for Nearly a Th ird of Cash Balances
In summary, we continue to view technology as a core and secular holding. We do not believe that
there is a technology bubble. We believe that for existing money making technology companies, valuations are inexpensive with strong balances that are use to increasing dividends and buy back shares. Although our specifi c company positions may change over time based on relative technology trends and valuations, we believe that technology exposure is important to long-term portfolio returns.
