If you are a long-time reader of mine, you know I have only been pushing two types of stocks in recent years: tech stocks and gold stocks. Today, there is a lot of “noise” suggesting the bull run in tech stocks is over. I’d like to put that fallacy to an end.
The biggest reason to turn pessimistic on technology stocks is their high valuations. If you read the financial news, chances are you’ll come across someone (almost daily) saying investors are paying top dollar for many tech companies that aren’t profitable and there is too much risk in that. They may be right in theory, but they are wrong in practice. If we took this attitude, investors would have never gotten in on some of the biggest names in tech, like Amazon.com, Inc. (NASDAQ:AMZN).
And some of the biggest names in tech are still far from their 1999 peak valuations…
Microsoft Corporation (NASDAQ:MSFT), for example, trades at a price-to-earnings (P/E) multiple of 27 and a price-to-sales (P/S) multiple of 5.3. In other words, for every one dollar of earnings at Microsoft, investors are willing to pay $27.00. And, for every one dollar of sales, they are willing to pay $5.30.
Looking back to 2000, at the peak of the Tech Bubble, Microsoft stock had a P/E multiple of 42 and a P/S of 17.4.
Microsoft stock is trading well below the valuation it once had.
Here’s what you also have to realize; tech stocks are being favored by investors because they have the most ability to grow. Technology companies are sitting on a significant amount of cash that could be used to grow their business. And they will use this cash to go out and buy more tech companies—just like how Microsoft bought LinkedIn Corp (NYSE:LNKD) for over $26.0 billion.
To give you some perspective on how much cash tech companies have, look at the table below.
|Amazon.com, Inc. (NASDAQ:AMZN)||$16.54 billion|
|Apple Inc. (NASDAQ:AAPL)||$62.62 billion|
|Alphabet Inc (NASDAQ:GOOG)||$76.94 billion|
|Cisco Systems, Inc. (NASDAQ:CSCO)||$63.51 billion|
|Facebook Inc (NASDAQ:FB)||$23.29 billion|
|Microsoft Corporation (NASDAQ:MSFT)||$113.04 billion|
The six tech stocks in the table above have over $355.0 billion in cash. How big is this sum? Wal-Mart Stores, Inc. (NYSE:WMT), the biggest retailer in the world, has a total market capitalization of about $230.0 billion. Combined, these tech companies can buy Wal-Mart 1.5 times.
Tech Stocks Outlook for the Rest of 2016
Dear reader; look at the big picture and recent history when it comes to tech stocks. Sure, the stock market will go up and down and so will the prices of tech stocks. But over the long term, Amazon.com will become the world’s biggest retailer. Facebook will be how people communicate. And Apple could compete against Tesla in the electric car market. Tech is the future of America and investors will always be willing to pay a premium for a piece of that future.
Tech stocks and gold stocks have been the best investments to own this year and I believe that trend will continue. Sure, the stock market is at a recent high and we can expect a pullback from these oversold levels, but for tech, I see a pullback as an opportunity to invest in the future. It is the stocks of the traditional brick-and-mortar, old school companies that I am worried about.