Comments on: Why tech stocks deserve to be cheaper than industrials http://blogs.reuters.com/felix-salmon/2011/07/25/why-tech-stocks-deserve-to-be-cheaper-than-industrials/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: ZacharyST http://blogs.reuters.com/felix-salmon/2011/07/25/why-tech-stocks-deserve-to-be-cheaper-than-industrials/comment-page-1/#comment-28942 Tue, 26 Jul 2011 03:11:15 +0000 http://blogs.reuters.com/felix-salmon/?p=9089#comment-28942 Just a minor quibble. The chart tells us nothing about the relative prices of the goods to each other, only to their own price in 1982. The chart doesn’t say that all those goods were the same price in 1982, so we have to assume that the baseline is just whatever their price was. So fruit is 2x more expensive than it was in 1982; Coke, around 50%. But we can’t say fruit is 2x more expensive now than Coke was because we have no idea what it cost then. Fruit today could still be cheaper than Coke today.

]]>
By: DavidMerkel http://blogs.reuters.com/felix-salmon/2011/07/25/why-tech-stocks-deserve-to-be-cheaper-than-industrials/comment-page-1/#comment-28924 Mon, 25 Jul 2011 21:19:26 +0000 http://blogs.reuters.com/felix-salmon/?p=9089#comment-28924 Industry benefits from the hardware and software developed in the tech sector. Most of the gains from improved technology accrue to the users, not the creators.

]]>
By: ErnieD http://blogs.reuters.com/felix-salmon/2011/07/25/why-tech-stocks-deserve-to-be-cheaper-than-industrials/comment-page-1/#comment-28913 Mon, 25 Jul 2011 17:27:41 +0000 http://blogs.reuters.com/felix-salmon/?p=9089#comment-28913 Stocks have P/E rates that are forward looking in that they assume the company will be there several years from now still churning out product people want. Ultimately investors need to see returns from stocks in either dividends or the promise of a liquidation or buy-out value of the company much greater in the future than today.

There lies the rub for tech companies. Moore’s Law dictates that the entire industry will be subject to massive change once or twice per decade due to the dramatic increases of computing power and memory storage. A glimmer in somebody’s eye in 2000 may have become commercially feasible in 2004, very cost effective in 2008, and replaced by something else in 2011. There are very few other sectors subject to this massive rapid change.

Why would an investor pay 40x annual earnings for something that pays no dividends, and then simply vanishes without a trace a decade later? Fundamental investing indicates that the 40x implies that it will be of much greater value a decade hence than today.

]]>
By: KenG_CA http://blogs.reuters.com/felix-salmon/2011/07/25/why-tech-stocks-deserve-to-be-cheaper-than-industrials/comment-page-1/#comment-28902 Mon, 25 Jul 2011 13:40:10 +0000 http://blogs.reuters.com/felix-salmon/?p=9089#comment-28902 One thing that is not addressed in the comparison between tech stocks and other industrials is the earnings growth rate. A large reason tech stocks have traditionally had higher P/Es is they have had higher growth rates. They often don’t pay dividends, so the only reason they have high P/Es is their earnings are growing much faster than non-tech companies. However, it’s possible that the growth rates of many publicly traded tech stocks have slowed down in the past few years, which would generate lower P/Es. It would be nice to see that graphed alongside the average P/E for tech companies.

]]>
By: Curmudgeon http://blogs.reuters.com/felix-salmon/2011/07/25/why-tech-stocks-deserve-to-be-cheaper-than-industrials/comment-page-1/#comment-28900 Mon, 25 Jul 2011 12:39:47 +0000 http://blogs.reuters.com/felix-salmon/?p=9089#comment-28900 @winstongator: Intel has been dealing with it for the last decade. What miniaturization enabled with increased clockspeeds, which largely drove performance in the 1980s and 1990s. Today it’s multicore processors, which rely much less on miniaturization and more on parallel processing. Of course, this is driving a major shift in software development, which will not be fully complete for at least another decade (and probably much longer).

The problem with Microsoft is that the large bulk of its profits come from Windows and Office upgrades, products that were first conceived and built in the 1980s, and which came to dominance in the early to mid 1990s. It has not shown the ability to use its extensive resources to lead in new markets such as search, phones, and tablets.

Microsoft has the classic big company disease (http://wp.me/pJhAL-6k). It is less risky and more profitable to offer improved versions of existing products than to enter new markets. Desktop computing isn’t going away, and Microsoft will continue to make a lot of money from these products for a long time. They just don’t define computing any more.

]]>
By: winstongator http://blogs.reuters.com/felix-salmon/2011/07/25/why-tech-stocks-deserve-to-be-cheaper-than-industrials/comment-page-1/#comment-28899 Mon, 25 Jul 2011 11:15:49 +0000 http://blogs.reuters.com/felix-salmon/?p=9089#comment-28899 Are you really holding MSFT as a loser stock since 1998? They’ve earned > $100B over that period and paid out massive dividends – plus it’s held close to the DOW up 63% vs up 67% for the DOW. Funny to use KO also, as it’s only up 8% over that period – compared to MSFT up 63%.

It is easy to see that the price of name-brand carbonated sodas would increase at a slower rate than fresh fruits and vegetables. Look at the price inputs. The majority of the cost of a can of Coke goes towards marketing and management. How about fresh fruits & veggies – land costs, labor, transport & fertilizer. Sure HFCS can double in price because of corn’s price, but really, how much does that impact Coke’s cost?

What should concern you about Intel is that their engineering philosophy – build it smaller – the driver of Moore’s law, will be necessarily constrained by physics. You can’t build layers less than one molecule thick, and when you get to one molecule, as opposed to say ten or a hundred, things behave much differently. How intel will deal with the inability to simply reduce feature size is a bigger threat to its long-term future than it merely being a tech business. For MSFT, you can take the philosophy that new software will always be needed. Even when new Intel processors slow in their introduction, there is a lot of room to improve the efficiency of MSFT’s products.

]]>
By: y2kurtus http://blogs.reuters.com/felix-salmon/2011/07/25/why-tech-stocks-deserve-to-be-cheaper-than-industrials/comment-page-1/#comment-28897 Mon, 25 Jul 2011 11:07:37 +0000 http://blogs.reuters.com/felix-salmon/?p=9089#comment-28897 Great post Felix!

Safe dollars are worth more than risky dollars and a dollar today is better than a dollar tomorrow. I love investing in industiral businesses which for whatever reason are trading below net tangible book value. That measure excludes the value of goodwill, brand, and even intellecutal property.

Finding stocks trading at less than that metric are rare and they all tend to be micro-caps or destressed companies. Still though there is such a huge margin of safety that even if the company goes through a liquidation you’re going to get some kind or a recovery.

Having said all that I still think large cap tech is cheap relitive to every other sector except energy right now. It takes a long time for industrial or even consumer companies to get global. Tech is so ubiqutous globally that Apple dosen’t even have to open stores in China… they just open themselves!

]]>