Why Are Big Tech Stocks So Cheap?

During the recent media frenzy surrounding the Facebook (Nasdaq: FB  ) IPO, it seemed like we were in the midst of yet another tech bubble. Once again, investors were buying seemingly overpriced shares in a company with a questionable business model. When will investors ever learn?

Actually, they may have already learned their lesson. According to Bespoke Investment Group, the technology sector has a lower P/E ratio than the utilities sector. As of June 22, utilities were trading at a trailing P/E of 14.95, compared with 14.48 for technology. The venture capitalist and Silicon Valley luminary Marc Andreessen thinks that large-cap tech stocks in particular have extremely low valuations right now. He adds that he hates to second-guess the market but thinks these companies might be great bargains at the moment.

Second-guessing the market
Here are four large-cap tech stocks that Andreessen, in a recent interview with Charlie Rose, mentioned as being possibly undervalued.

Company

Market Cap

P/E ratio

Microsoft (Nasdaq: MSFT  ) $257 billion 11.20
Cisco (Nasdaq: CSCO  ) $92 billion 12.65
Google (Nasdaq: GOOG  ) $189 billion 17.58
Apple (Nasdaq: AAPL  ) $546 billion 14.23

Data from S&P Capital IQ as of June 29.

When Rose asked why these companies are undervalued, Andreessen offered an interesting response. First, he noted that the main output of a tech company is innovation. What a company has shipped in the past is only a small proportion of its value. Tech companies can't rest on their laurels and always must be looking ahead to new products.

His second point was more provocative, however. Andreessen added that many investors are staying away from tech because they are still in a "bad mood" as a result of the dot-com crash from more than a decade ago. He compared it to the Great Depression, when an entire generation was turned off by stocks. According to Andreessen, there are a lot of investors out there who are "bitter and cynical" about tech stocks. And this might mean there are some very good bargains available.

Andreessen believes that Cisco, Microsoft, Google, and Apple are great companies with bright futures ahead of them. He told Rose that either one of two things is true. Either he is correct and there are some great bargains to be scooped up, or the market is correct and these firms are on the verge of "disintegration." Andreessen  believes there is still a lot of innovation coming from these companies, so he's pretty skeptical of the latter viewpoint.

A cautionary tale from RIM
I respect Andreessen a lot, and I really appreciate his insights on Silicon Valley. I think he may be overstating the current impact of the dot-com crash on tech valuations, however. His first point about future uncertainty facing these companies seems like a better explanation for current tech valuations, in my opinion. There is so much innovation right now that some companies might see their businesses disrupted almost overnight. Research In Motion is a perfect example of this phenomenon. About four years ago, it had 41.1% of the U.S. market share for smartphones. As of Q1 2012, it had 3.6%.

The rapid trend toward mobile raises a lot of uncertainty for companies like Facebook, Google, and Microsoft. Will they be able to respond to this changing world? Fred Wilson of Union Square Ventures likens it to having to "make a hard right turn super-fast without flipping the car." Given the degree of difficulty involved with such a maneuver, maybe investor skepticism toward big tech companies is understandable.

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John Reeves owns shares of Apple and Google. You can follow him on Twitter, @TenBaggers. The Motley Fool owns shares of Cisco Systems, Facebook, Apple, Google, and Microsoft. Motley Fool newsletter services have recommended buying shares of Apple, Microsoft, and Google and creating bull call spread positions in Microsoft and Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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  • Report this Comment On July 02, 2012, at 7:47 PM, brenoboyle wrote:

    Big tech companies are caught in a tough spot. Because historically they return little or no money to shareholders the allure of holding a mature tech company just isn't there.

    Look at GOOG as a prime example. They are sitting on obscene amounts of cash and refuse to pay anything back to the shareholders who supposedly own the business. I read in their annual report that all the money is in fixed income securities. So much money that for every 1% interest rates increase GOOG will lose $1B. I understand setting money aside to be sure you can run the business, but this policy of hiding money under the mattress is just insane.

    AAPL is a great buy because they get it. They are returning cash to shareholders to the tune of 3% per year. When GOOG, ORCL and CSCO wise up and start acting like the blue chip stocks that they are I may consider buying them.

  • Report this Comment On July 02, 2012, at 9:03 PM, TMFBane wrote:

    Yes, I agree with your thoughts on Apple. Intel is another outstanding tech company that is returning cash to shareholders.

    I'm also very bullish on Google, but recognize that they will need to be disciplined in how they deploy all that cash.

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