By Ben Eisen, MarketWatch
NEW YORK (MarketWatch) --Exuberance in the tech sector is easy
to come by these days. The question for investors is whether it's
irrational --and another reason to get out of record-high
stocks.
Alongside multiple all-time highs for the S&P 500 (SPX) and
Dow Jones Industrial Average (DJI), the dollars attached to
Internet startups Zulily Inc.(ZU) and Snapchat fed talk of "froth",
"bubbles" and a redux of the stock-market battering that followed
stock peaks in the mid-2000s and late 1990s.
The spotlight is likely to stay on the tech sector next week as
two seasoned heavyweights, Microsoft Corp. (MSFT) and Cisco Systems
Inc. (CSCO), host shareholder meetings. Chinese online
sports-betting company 500.com will also launch its IPO next week.
So too will high-end retailer Vince, which also operates
brick-and-mortar stores.
Salesforce.com Inc. (CRM) will hold a developer conference next
week that coincides with its earnings announcement on Monday. Also
on the tech earnings calendar: online radio firm Pandora Media Inc.
(P), data-software firm Splunk Inc (SPLK), and Marvell Tech (MRVL)
on Thursday.
"There is a real shortage of growth stories in the equity
markets," said Nick Colas, chief market strategist at ConvergEx
Group, a brokerage company based in New York. "It's hard to find a
company that can grow revenues and earnings 10%, 15%, 20% in a
given year. When you find it, it gets a premium."
The excitement over growth companies like Internet firms has
unsurprisingly played into concerns that conditions in the broader
equity markets are bubble-like. But many stock forecasters contend
that even if there is "frothiness" in the markets, excitement in
the tech industry isn't going to be what makes it flow over. (Read:
Mark Hulbert on why we aren't in a bubble.)
This past week saw internet startup Zulily shares close 71%
higher than their initial public offering price on their first day
of trade Friday. Mobile app Snapchat -- a company with zero revenue
-- reportedly turned down a $3 billion buyout offer this week from
Facebook Inc. (FB). And Twitter Inc. (TWTR) debuted options trading
less than two weeks after it started trading at nearly $20 above
its offering price.
Internet stocks have been on a tear this year, with the
PowerShares Nasdaq Internet Portfolio (PNQI) exchange-traded fund
up over 56% year-to-date, and Global X Social Media Index ETF
(SOCL) up over 54%. Those gains have been led by momentum stocks
like Facebook (up over 84% year-to-date), Yelp Inc. (YELP) (up over
275%), and Linkedin Corp. (LNKD) (up over 101%).
The tech-heavy Nasdaq Composite (RIXF) is up a more modest 32%,
but at 3,986 points, it's closing in on the 4,000 milestone.
"Investors are certainty rewarding social media names on
potential ad revenues, and ultimately profits, in the years ahead,"
said Andrew Wilkinson, chief economic strategist at Miller Tabak.
"All that excitement is helping drive the sector more than
fundamentals."
That doesn't mean everything is bright and cheery in the tech
sector, which has actually lagged the broader S&P 500 index
year-to-date. The Select Sector SPDR-Technology (XLK) index is up a
mere 18.9% on the year, compared to an S&P gain of 26.1%.
There's a divergence within the sector between the hot social
media names and some of their cooling counterparts. That was on
display as Cisco shares slumped 11% on Thursday after the IT
company lowered its profit outlook for the current year. Online
textbook-rental company Chegg Inc. (CHGG) , which went public
Wednesday, also saw shares flop at their trading debut.
Growth in the traditional large-cap tech sector generally hinges
upon two factors: consumer confidence and capital spending, says
Colas of ConvergEx Group. Those factors don't always overlap with
the momentum that's played into growth on the upstart Internet side
of the sector. Nonetheless, the same type of growth investors tend
to buy both types of stocks, which means there's been somewhat of a
rotation from the traditional names to the newer ones, he said.
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So should we be worried about what happens to the broader market
if the momentum reverses? Not necessarily, says Colas. Comparisons
to the tech bubble of the late 1990s and early 2000s may be
compelling, but there are key differences.
At the height of the dotcom bubble, information technology
companies made up 34.5% of the value of the S&P 500, says
Colas. At the end of 2012, they made up 19%.
"If you get a rollover in a particular sector it could take the
rest of the market down," he said, noting that the tech sector's
smaller composition of the broader market reduces the risk.
Plus, the broader market, despite once again closing at record
highs, remains reasonable from a price-to-earnings ratio
standpoint, according to Jessica Hinds, global economist at Capital
Economics.
"Granted, the cyclically-adjusted price/earnings ratio of the
S&P 500 is more than 20% higher than its average over the
period 1975 to 2012," she said in a note. "But it is nowhere near
as elevated as it was during the dot com bubble: stock prices would
have to rise significantly further to reach those levels."
For more: Therese Poletti: Internet bubble is California's next
big quake.
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