First there has been a wave of positive earnings news, with forecasts of more to come. The tech component of the S&P 500 posted aggregate profit growth of 14 per cent in the latest quarter, nearly double the estimate of analysts surveyed by Thomson Financial. And it is likely to exceed next quarter's prediction of 9 per cent.
We also learned that Google, one of those big profit-makers, has surpassed the likes of Coca-Cola, General Electric, Microsoft and IBM to become the world's most valuable brand. Not bad for a 10-year-old company that is essentially an Internet search engine and advertising vehicle.
And now the wheeling and dealing is back on a grand scale, and so are the clashing egos. Yesterday, it was reported that Microsoft is pursuing Yahoo in a deal that could be worth up to $50-billion (U.S.). This follows Yahoo's own acquisition of an advertising exchange for a mere $680-million. Talks between the two appear to be on hold.
The logic behind a partnership of some sort between the two companies, which has been mooted before, is unassailable: Google is eating both companies' lunch when it comes to online growth. The company accounted for 43 per cent of all U.S. Internet search activity in April, compared with Yahoo's stable share of less than 30 per cent and Microsoft's declining 13 per cent. Moreover, Google has outbid Microsoft for a lucrative deal with AOL and spent $3.1-billion for privately held online advertising heavyweight DoubleClick.
One sticking point is that Yahoo co-founder Jerry Yang isn't a big fan of Bill Gates, which is where the clashing egos come into the picture. That's also said to be the reason why another intriguing marriage, that of Amazon.com and eBay, is unlikely. Their respective bosses simply can't stand each other.
All of this has a frothy feel to it, but that's simply not the case. The bursting of the dot-com bubble in 2000 was so devastating for money managers and investors overexposed to technology that it should have acted as a deterrent to overblown expectations. And this has largely proved to be the case. Gone are the days when companies could peddle shares based on promises and dreams, aided and abetted by a handful of well-placed analysts who played fast and loose with the truth to help their firms peddle shares.
Even now, the strongest players in tech land still have trouble getting the respect their performance should merit (overpriced Google excepted). As a result, Microsoft, Cisco and other heavyweights still trade at relatively low multiples, considering their genuine earnings power, strong balance sheets and large hoards of cash. A monster acquisition would barely make a dent in Microsoft's coffers.
“Broadly speaking, the valuations today actually make some sense,” says Robert Spafford, an investment analyst with Toron Capital Markets in Toronto. “The sector is growing faster than the economy, but the stocks have done almost nothing.” Cisco, for example, trades at just above 20 times earnings, yet it commands a market share of up to 80 per cent in its key product categories and generates as much as $2.5-billion in cash a quarter.
Moreover, it's easy to evaluate. The days when companies concocted all sorts of measures to impress gullible investors are long gone.
“We can evaluate a company on traditional metrics such as cash flow,” says Mr. Spafford. “We're no longer looking at things like the [stock] price per number of engineers [employed].”
Laura Wallace, managing director with Coleford Investment Management in Toronto agrees. “We're not even close to another bubble, at least on technology.” But it will be a long time before tech comes back as a market leader, even as the profits roll in and the deal-makers do their stuff.
