Are we in the middle of a new, soon-to-burst tech bubble? If you're looking for evidence, look no further than the sky-high valuations of companies like Facebook ($85 billion), Groupon ($25 billion) and Twitter ($7.7 billion).
I'm astounded by how much money is flooding into Silicon Valley, says Thomas Weisel, who founded an investment bank that flourished in the first internet boom, as quoted by The New York Times. "The pools of capital ... are far greater today than what you had in 2000." Indeed, says Roger McNamee, another investor quoted by the Times. There's a mistaken belief that "every social company will be as good as Facebook."
But not all analysts are convinced that the tech sector is a bubble.
"While we can see many signs of a bubble these days, it's important to keep in mind that signs of a bubble look almost exactly the same as signs of a boom," writes Ben Horowitz, co-founder and general partner at Andreessen Horowitz. We "are at the very beginning of a gargantuan new technology cycle: the move from Web/PC computing to cloud and mobile."
According to Horowitz, the shift to cloud computing will have a more profound impact on the computing ecosystem than the shift to client/server during the '80s.
"Will all the excitement around the opportunities created by the Internet and the shift to cloud/mobile computing eventually lead to a bubble? Absolutely. Are we in a bubble today? I don't think so."
There are a few important differences between the last dot-com bubble and now. "For one, the stock market is not glutted with offerings," explains Dealbook. In 1999, there were 308 technology IPOs, making up about half of that year's offerings, according to data from Morgan Stanley. In 2010, there were just 20 technology IPOs, based on Thomson Reuters data.
More important, the tech start-ups that have attracted so much interest from investors have real businesses -- not just eyeballs and clicks. Companies like Facebook have fast-growing revenue. Groupon, which has been profitable since June 2009, is on track to take in billions in revenue this year. Compare this to the hundreds of companies that went public in 1999 with no real business plan.
So how do you find tech ideas trading at attractive valuations? To create this list, we started with a universe of about 200 tech stocks that have seen net institutional inflows over the last three months (data sourced from Reuters). We then narrowed down the list by only focusing on those names that are undervalued relative to their projected earnings growth and free cash flow (data sourced from Finviz).
Valuation ratios suggest these companies are bargains -- and institutional investors seem to agree. What do you think? (Click here to access free, interactive tools to analyze these ideas.)
1. China GrenTech
3. RF Micro Devices
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.
Kapitall's Eben Esterhuizen does not own shares of any companies mentioned.