Techno stocks power the surge to an info economy
Technology stocks are generally not overvalued if evaluated in terms of the longer-term changes that are occurring to the economy.
So says Paul Davis, a speaker at the upcoming IFSA conference and the founder of TechInvest, a wholesale fund manager specialising in technology investments with more than $50 million under management.
However, he adds that there are certainly some exceptions to the rule. Some technology stocks are overpriced "as investors attempt to avoid the cost of information by following the herd".
Davis believes that technology stocks are volatile by virtue of their extraordinary growth rates and future cash flows.
"Even a slight change in growth rate or discount rate creates a proportionately larger valuation change in present dollar terms. This is a phenomenon very familiar to speculative resource investors."
Davis says he has now been through enough of technology 'mini-bubbles' to discard them and focus instead on the underlying trends.
"We would all remember the bubbles associated with microchips, PCs, software, mobile phones. Yet, we are currently no more than halfway through a massive economic shift from a manufacturing to an information economy," he says.
It has been estimated that technology accounted for 40 per cent of the growth
in US GDP since the end of the 1991 recession. And, the world MSCI stock index is now weighted 17 per cent in technology.
The growth industries in this new economy are computers, software, semiconductors, communications, the Internet, and medical technology, Davis says.
Much of this rapid underlying growth is driven by the decreasing cost of computing power and the increasing value of networks. One hundred megabytes of disk storage cost $250 in 1988 and $4 in 1999. Since 1970 the cost of computer memory has fallen by 28 per cent a year.
"So much is said about the Internet that the fundamental issues can be lost in the hype," Davis says.
"What the Internet has done is introduce a universal efficiently shared platform for communication of all kinds - transactions, text, graphics, audio, video. This has introduced a rate of change to the economics of many traditional industries completely beyond anything they had ever seen."
But Davis adds that there were 4,800 IT and communications equity transactions in 1998 and only 257 - or 5 per cent of them - were in the Internet sector.
"Internet stocks get all the publicity. There is huge activity in other technology stocks and yet this goes unmarked," he says.
"They are not overvalued relative to the long term trends. Among companies between $50 million and $1 billion in revenue, the median company is trading at only 1.5 times revenue."
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