Five Things You Need to Know: Why Is Tech So Hated?
Owning tech isn't easy. But when the market develops tunnel vision around a few key themes -- like commodities or the dollar collapse -- there's often money to be made elsewhere.
It's a question with multiple meanings. On the one hand, given our recent history with banks, bailouts and blowups, the question is asking if tech companies are somehow over-leveraged and meandering blindly into bubble territory. (cf. LinkedIn (LNKD), Groupon, Zynga, Pandora, Facebook or the random tech IPO flavor of the day.) On the other hand, the question considered by Peter Thiel in this TechCrunch piece by Sarah Lacy is, How did tech companies get to be like banks, so boring?
It's an interesting viewpoint. Over the past decade banks have been anything but. Of course, I remember from the perspective of the 1990s when banks were, in fact, boring. Banks at that time simply took in deposits from customers, paid a certain interest rate on those deposits, and, at what was then a fairly reasonable capital ratio, earned a spread on the money they charged to loan that capital back out to borrowers. They paid investors a steady dividend stream, but that was about it. It was boring work. Really boring. We're talking Mr. Drysdale from the Beverly Hillbillies boring, 1 p.m. tee times and two-hour, three-cocktail lunches boring. Banking really didn't get exciting until 1999 when Glass-Steagall was repealed -- the perfect culminating event to close off an inevitable crest in peak positive social mood.
“The problem is these big tech companies are just like banks now; all they do is print money," Thiel tells Lacy. "Think about it – 90% of Google’s projects don’t make any sense. But [these companies] have [all] identified themselves as technology companies. It’s a big part of their self image.” He continued, “(Running these companies) is just not fun."
Perhaps. Like Lacy, Minyanville Professor Conor Sen and I have also been puzzling over the valuations of these tech companies, and both of us have been slowly building positions in a number of tech stocks. Yesterday Sen noted that Google (GOOG) at $504 a share, $104 in cash, and at $40 EPS estimates for 2012, is trading at 10-times ex-cash estimates. Cisco (CSCO) price-to-book is 1.78. As Thiel points out, tech is hated. In a sense I can understand why. Yesterday BusinessInsider ran a great chart showing just how hated tech really is; relative to industrials the cheapest in 35 years. Yet all anyone seems to want to talk about is energy, commodities and gold and silver.
It wasn't always so. In 1995 or so, when I worked at PaineWebber, I remember pitching clients on a drilling company. This one guy laughed and said, "What am I J.R. Ewing? Do you have any ideas in tech?" And good luck getting anyone to look at a bank in those days.
Of course, even today, even at these valuations, owning tech isn't easy. I own CSCO, which is a bit like waking up each morning and starting your day by giving yourself a paper cut and punching yourself in the face. But that's beside the point. The point is that when the market develops tunnel vision around a few key themes -- commodities, the looming Malthusian food crisis, energy stocks, the dollar collapse, bond collapse, sovereign defaults, Bitcoins, gold and silver -- there is usually money to be made elsewhere.
Increasingly, a compelling fundamental case for tech is beginning to align with what I see as a compelling technical case.
2. An At-a-Glance Look at Middle East Turmoil
One of the many cool things in Bloomberg is the relatively new interactive mapping functionality. I mean, 10 years ago this is the stuff from high-tech spy movies. I ran the following map to display protest locations in the Middle East and North Africa. Red means the protest is active, yellow indicates it has diminished. The size is indicative of the magnitude of the protests.
On the map below you can see the Libyan conflict and the refinery outages impacting global crude oil supplies.
Click to enlarge
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