How should tech. be valued?
Given that tech. has been selling off strongly, I've been wondering just low prices can go, and how low should they go? The can question is market-related, and the should question is fundamentals-related.
To get a handle on this, I looked at historical P/E's on a few of the tech. bellwethers: AMAT CSCO MSFT NTAP INTC SUNW ORCL QCOM. I had access to P/E data going back only back to 1995 (Marketguide on Yahoo!), and had to extrapolte the year 2000's P/E ranges, because they're not posted yet. Here's waht I came up with:
P/E Low for the Year
Current 2000 1999 1998 1997 1996 1995
AMAT 15.91 14.21 23.40 32.38 13.14 6.66 7.23
CSCO 93.29 85.67 78.29 42.92 29.93 23.35 22.48
INTC 17.68 17.53 23.78 19.02 16.26 8.58 7.81
MSFT 24.64 22.80 48.06 37.37 30.77 23.27 25.11
NTAP 279.08 147.26 83.61 44.52 999.9 48.08 N/A
ORCL 25.49 18.85 24.19 21.75 25.66 29.26 26.69
QCOM 95.69 60.58 21.14 25.79 30.57 102.6 38.83
SUNW 44.96 40.52 34.68 19.84 13.20 14.90 8.26
(I wanted to add JDSU into the table, but it has been a money loser for the past 4-5 years, which highlights the discrepancy between its Wall Street image and its actual financial performance.)
If we assume that in a mild recession that the stocks are capable of revisiting their low P/E's set in 1995-6, and we assume that current earnings levels can be sustained then:
(1) MSFT and ORCL are presently more/less fairly valued
(2) INTC and AMAT could drop further by 50%
(3) CSCO and QCOM could drop further by 75%
(4) SUNW and NTAP could drop further by 80%
It is difficult to see how drops in valuation of 50% to 80% in blue-chip techs. could happen without a complete market meltdown, but the numbers above do show just how bad things might get, if the market approached more historically normal valuations. |
