Tech Stock Values For Dummies

Yesterday’s sharp sell-off in the Nasdaq showed the market something. In a downturn, the Apples (AAPL) and RIMMs (RIMM) of the world have an Achilles Heel. They have run up too much. At one point, RIMM was off 11% and hot IPO VMWare (VMW) was down almost 13%.

So, what are the super-hot techs worth? Wall St. clearly has hundreds of analysts working on those issues and they are the smartest guys in the room, so debating with them would seem futile.

But, looking at some of the better stocks around like Microsoft (MSFT), Oracle (ORCL), Intel (INTC), Cisco (CSCO), HP (HPQ), and Verizon (VZ) and the going PE is about 25.

Apple’s PE is 44. RIMM’s is 81. VMWare’s is 184. Google’s (GOOG) is 54. Amazon’s (AMZN) is 96.

The first thing most analysts would say is the Wall St. has to look at the forward PE, the PE for next year. But, forecasts are notoriously wrong, so a forward PE for current valuation may be a good guess, but it is a guess nonetheless.

Another point almost every analyst would make is that companies like Apple and RIMM are growing faster than Oracle or Microsoft. The forecast for the current fiscal year is that Oracle’s EPS will be up about 21%. Microsoft is also about 21%.

The projected growth rate for Apple’s EPS is 27%, so not all that much better than some of the less highly valued companies. At Google, however, the figure is 47%. RIMM’s EPS is expected to almost double in the next fiscal year. But, once again, those are forecasts, not the "real world."

As the rate at which EPS is growing for any company moves up, the risk to the hitting the number is probably greater. A company like RIMM could suddenly face real competition from Apple or Nokia. Google could be hit by a big slowdown in the US ad market. VMWare might face a real challenge from the Microsoft virtualization effort.

Even with strong growth prospects, in a dicey market, can a forward PE above 40 be justified for most of the hot tech shares. Maybe, but if the Nasdaq keeps falling, those numbers may get harder to defend. A 40 PE is almost double where Microsoft’s sits now.

What would that mean. That Apple is worth $150 and not $175. It did trade at $150 in September. It would mean RIMM is worth about $65 and not $124. It did trade at $65 in June. It would say Google is worth $515 and not $694. But Google was at $515 just this last September.

If the Nasdaq falls, a lot of stock could move toward a 40 PE. That is a big haircut for some high-fliers.

Douglas A. McIntyre