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Two Ways to Play: David Einhorn's Tech Bubble


A hedge fund honcho claims we are in a second tech bubble.

On Tuesday, hedge fund giant David Einhorn of Greenlight Capital made waves across the investment community by claiming that "we are witnessing our second tech bubble in 15 years." This is an echo of the NASDAQ Composite's (INDEXNASDAQ:.IXIC) monumental late-1990s run.

Einhorn's case revolves around three indicators, which we'll quote from his quarterly investment letter:

  • The rejection of conventional valuation methods;
  • Short-sellers forced to cover due to intolerable mark-to-market losses; and
  • Huge first-day IPO pops for companies that have done little more than use the right buzzwords and attract the right venture capital.

So are we in a tech bubble, as Einhorn is suggesting?

After all, the NASDAQ is up 228% off its 2009 lows, the IPO market is booming, and tech giants such as Facebook (NASDAQ:FB), Google (NASDAQ:GOOG), and Yahoo (NASDAQ:YHOO) seem to be on never-ending acquisition sprees of companies with little or no revenues.

But there are two sides to the story, and they're represented in our two ways to play:

From The Bull Pen

If there was a second tech bubble, it already popped.

High-beta tech stocks such as FireEye (NASDAQ:FEYE) and Splunk (NASDAQ:SPLK) just collapsed, and the iShares NASDAQ Biotechnology Index ETF (NASDAQ:IBB) is 16% off its February high.

Meanwhile, the NASDAQ is still 19% below its 2000 high, and investors aren't rewarding tech stocks across the board. Some recent IPOs, such as King Digital Entertainment (NYSE:KING) and GrubHub (NYSE:GRUB) disappointed, and companies that disappoint on earnings -- Twitter (NYSE:TWTR) being one prime example -- get punished.

We're in a completely different ball game from the late 1990s, and valuations for quality tech companies such as Google, Qualcomm (NASDAQ:QCOM), and Apple (NASDAQ:AAPL) are fairly reasonable.

Sure, some tech names are trading at extreme earnings multiples -- but those companies, such as Tesla Motors (NASDAQ:TSLA) and Facebook, are also showing extreme growth.

For believers in technology's long-term business potential, the Technology SPDR ETF (NYSEARCA:XLK) is worth examining as it is heavily weighted in quality large-cap names.

From The Bear Cave
Yes, momentum stocks such as FireEye and Splunk are well off their highs and they're still putting out extreme revenue growth, but that doesn't mean they're not overpriced at 20+ times sales. And the supposedly cheap "quality" tech names like Apple and Google have clearly slowing earnings momentum.

FactSet Research Systems (NYSE:FDS) said last week that for this earnings season, the information technology sector is the second weakest sector for upside revenue surprises. It's also expected to show Q1 earnings growth of negative 0.8% on revenue growth of just 2.4%. 

You call that hot?

And from a products perspective, demand in key markets such as smartphones and tablets have grinded to a halt. We're a long way from 2010-2012. There's growth in social media, but it comes with extreme risk.

Most of the easy money has been made, and with middling economic fundamentals, it's hard to see what the bull case is after a 228% run.

One possibility for the bears is shorting the Global X Social Media Index ETF (NASDAQ:SOCL), which is levered to high-risk tech stocks such as Facebook and LinkedIn (NASDAQ:LNKD).

Twitter: @Minyanville

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No positions in stocks mentioned.

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