Tech exuberance feeds stock-market bubble talk

By Ben Eisen, MarketWatch

NEW YORK (MarketWatch) —Exuberance in the tech sector is easy to come by these days. The question for investors is whether it’s irrational —and another reason to get out of record-high stocks.

Alongside multiple all-time highs for the SP 500

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 and Dow Jones Industrial Average

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, the dollars attached to Internet startups Zulily Inc.

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  and Snapchat fed talk of “froth”, “bubbles” and a redux of the stock-market battering that followed stock peaks in the mid-2000s and late 1990s.

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Snapchat founder Evan Spiegel. The firm reportedly turned down a $3 billion offer from Facebook.

The spotlight is likely to stay on the tech sector next week as two seasoned heavyweights, Microsoft Corp.

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  and Cisco Systems Inc.

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, host shareholder meetings. Chinese online sports-betting company will also launch its IPO next week. So too will high-end retailer Vince, which also operates brick-and-mortar stores. Inc.

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  will hold a developer conference next week that coincides with its earnings announcement on Monday. Also on the tech earnings calendar: online radio firm Pandora Media Inc.

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, data-software firm Splunk Inc

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, and Marvell Tech

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 on Thursday.


“There is a real shortage of growth stories in the equity markets,” said Nick Colas, chief market strategist at ConvergEx Group, a brokerage company based in New York. “It’s hard to find a company that can grow revenues and earnings 10%, 15%, 20% in a given year. When you find it, it gets a premium.”

The excitement over growth companies like Internet firms has unsurprisingly played into concerns that conditions in the broader equity markets are bubble-like. But many stock forecasters contend that even if there is “frothiness” in the markets, excitement in the tech industry isn’t going to be what makes it flow over. (Read: Mark Hulbert on why we aren’t in a bubble.)

This past week saw internet startup Zulily shares close 71% higher than their initial public offering price on their first day of trade Friday. Mobile app Snapchat – a company with zero revenue – reportedly turned down a $3 billion buyout offer this week from Facebook Inc.

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. And Twitter Inc.

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  debuted options trading less than two weeks after it started trading at nearly $20 above its offering price.

Internet stocks have been on a tear this year, with the PowerShares Nasdaq Internet Portfolio


  exchange-traded fund up over 56% year-to-date, and Global X Social Media Index ETF

/quotes/zigman/7289836/delayed/quotes/nls/socl SOCL

  up over 54%. Those gains have been led by momentum stocks like Facebook (up over 84% year-to-date), Yelp Inc.

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(up over 275%), and Linkedin Corp.

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  (up over 101%).

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The tech-heavy Nasdaq Composite

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 is up a more modest 32%, but at 3,986 points, it’s closing in on the 4,000 milestone.

“Investors are certainty rewarding social media names on potential ad revenues, and ultimately profits, in the years ahead,” said Andrew Wilkinson, chief economic strategist at Miller Tabak. “All that excitement is helping drive the sector more than fundamentals.”

That doesn’t mean everything is bright and cheery in the tech sector, which has actually lagged the broader SP 500 index year-to-date. The Select Sector SPDR-Technology

/quotes/zigman/1475411/delayed/quotes/nls/xlk XLK

  index is up a mere 18.9% on the year, compared to an SP gain of 26.1%.

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There’s a divergence within the sector between the hot social media names and some of their cooling counterparts. That was on display as Cisco shares slumped 11% on Thursday after the IT company lowered its profit outlook for the current year. Online textbook-rental company Chegg Inc.

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 , which went public Wednesday, also saw shares flop at their trading debut.

Growth in the traditional large-cap tech sector generally hinges upon two factors: consumer confidence and capital spending, says Colas of ConvergEx Group. Those factors don’t always overlap with the momentum that’s played into growth on the upstart Internet side of the sector. Nonetheless, the same type of growth investors tend to buy both types of stocks, which means there’s been somewhat of a rotation from the traditional names to the newer ones, he said.

Read the latest on Twitter,Apple and Facebook.

So should we be worried about what happens to the broader market if the momentum reverses? Not necessarily, says Colas. Comparisons to the tech bubble of the late 1990s and early 2000s may be compelling, but there are key differences.

At the height of the dotcom bubble, information technology companies made up 34.5% of the value of the SP 500, says Colas. At the end of 2012, they made up 19%.

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“If you get a rollover in a particular sector it could take the rest of the market down,” he said, noting that the tech sector’s smaller composition of the broader market reduces the risk.

Plus, the broader market, despite once again closing at record highs, remains reasonable from a price-to-earnings ratio standpoint, according to Jessica Hinds, global economist at Capital Economics.

“Granted, the cyclically-adjusted price/earnings ratio of the SP 500 is more than 20% higher than its average over the period 1975 to 2012,” she said in a note. “But it is nowhere near as elevated as it was during the dot com bubble: stock prices would have to rise significantly further to reach those levels.”

For more: Therese Poletti: Internet bubble is California’s next big quake.


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