Will a new technology bubble burst?

The value of the Nasdaq Composite technology index has risen by about 23 percent in the past approximately 5 months (closer to its local low of September 21).

The value of the Nasdaq Composite technology index has risen by about 23 percent in the past approximately 5 months (closer to its local low of September 21). The most used arguments justifying the renaissance of the technology sector are:

The spread of annual rates in 2001 made it difficult for the sensitive technology sector.

The need for data security and the renewal of the technology “park” after the events of 11 of 2001.

The previous decline in the price of technological titles has been varied, their prices are now very low.

The first last factor (relative cheapness of technological actions) is the most debatable. Stock quotes and their intrinsic values ​​are influenced by the analyst’s recommendations. At the rate of the target price or the fair value of the share, they must operate in the models with expected growth in profit in the coming years. Although the intrinsic value model is complex, the analyzes usually include an estimated average earnings per share (EPS) growth in the next 5 years. This percentage speaks mostly about the expected prospects of the company, but at the same time: You have the expected growth, thus the risk that the company will not meet the profit finger. Konit disappointed investor in a drop in price.

Company

The last
price

P/E
2001
Cl.
Price (USD)

5Y
EPS Growth

1Y
EPS Gr. (SSB)

Source
estimate

24.10.
(USD)
k
24.10.
2000 2001

2000

2001 2001/00 2002/01

2000

2001
Microsoft

60,43

33,7 115 60 20% 10% 4% -1%

LB

SSB
Intel 25 54,2 40

40

25% 25%

-72%

38%

LB

SSB
Texas
Inst.

28,6

331,6 105 37

20%

20%

-93%

11%

ML

SSB
IBM

105,81

24,7

150

135 12% 15%

-2%

11%

ML

SSB
Cisco

16,41

42,0

85

21

35%

25%

-23% -39% ML SSB
Prmr

97,2

22% 19% -37%

4%

Zdroj odhad: Merrill Lynch, Lehman Brothers, Salomon Smith Barney

A look at the profitability indicators for technology “giants” in the table, which are appropriately selected as representatives of individual segments of the technology sector, suggests what we can expect in the future. It is particularly interesting to see how the analysts of the world’s largest brokerage houses (Merrill Lynch, Lehman Brothers, Salomon Smith Barney) estimated the prospects of companies in the last quarter of 2000, and how they estimate them now. Tariff prices fell sharply (averaging 40%, with Intel remaining the same). However, the predicted average long-term growth of the EPS sample was only minimal, in the case of IBM the prospects even improved. Here it is you who state that the difference may be the person of the analyst, respectively. broker house. However, for all technology companies (various analysts / brokers) the double-digit average earnings per share in five years is estimated even in the middle of this year. The main question is: a large technology company really double digit finger profit in five years?

A confrontation estimate with the latest data from companies shows that this is unlikely. The global economic slowdown is one thing, confirming the growth trend of the species. Earnings per share of the technology company fell by ten percent this year, the forecast for five years is not much better. In addition, my fingers will come out of the dream storehouse. The visibility of IT companies’ managers dates back to the end of 2002. A survey of Merrill Lynch’s 50 global CIOs (IT managers) following terrorist attacks in the United States revealed the following:

  • The spreads of companies for IT purchases will not increase by 5% in the first year, but only by 2%.
  • The turning point in the declining trend of these purchases will not break in the second, but in the third quarter of 2002.

The quarter’s managers said terrorist flows had negatively affected their business. In addition, all respondents (92%) said that the price of wolves would remain in 2002, most of which should fall to PC manufacturers, data storage and server producers. You will be in demand for specialized software, especially of the security type.

The estimated single-digit profit growth in 2002 does not yet correspond to the analysts’ estimates on which the daily share prices are based.

So what can be recommended?

  • Invest in technological actions with the utmost care. The risk of loss is still very high. On the other side of the salary – it is not possible to look negatively at the whole sector – individual companies have different growth prospects. Nap. IBM shares oscillate it for two years around the value of 100 USD, the decline in the technology market did not significantly affect them.
  • Don’t buy individual titles or just technology. The risk of a mutual fund portfolio is much lower.
  • Technology stocks are a high-risk sector with strong growth, so stocks are declining (and growing) in the various markets at various times.

Why did the value of the Nasdag Composite technology index increase over the past month? Do you think that this value will be increased or reduced further?