Reuters / John Gress
- Bernstein clients keep asking the firm whether tech stocks are in a bubble as concerns mount that the sector is nearing dot-com-level valuations.
- Bernstein explains why the tech industry is in a far healthier place now, and offers some recommendations for how traders can keep making money in the space.
Bernstein clients can't stop asking about a bubble in tech.
That's according to analysts at the firm who cover the sector - the same folks who have embarked upon a quest of sorts to figure out if tech stocks are, in fact, trading at dangerous levels.
It's a fair question. Some experts across Wall Street have been sounding the alarm for months about overextended valuations throughout the entire stock market. And some of the charts they've put forth are scary. By multiple measures, equities are historically overinflated.
Bernstein sought to dig a little deeper in a recent note entitled "Tech is Partying like it's 1999 - Are we in another bubble?" What the firm found throws a bit of cold water on the thesis that tech specifically is overvalued.
The focal point of Bernstein's argument is summarized in the charts below. They show that, when compared to forward earnings, current tech valuations have been kept far more in check than in 1999 - or the period preceding the bursting of the dot-com bubble.
How is this possible? Bernstein notes that valuations have stayed largely in line with history because profits have grown quick enough to keep pace with ever-expanding stock prices.
This leads to another key point made by Bernstein: that tech companies on the whole are both more mature and larger than they were two decades ago. The average firm now generates more than three times the revenue and five times the free cash flow it did back in 1999, according to Bernstein data.
Bernstein also highlights some key differences between today's tech conglomerates and other types of companies that have recently fallen on hard times.
"While industrial companies such as GE provide a sobering example of how large companies can fall into decline, we believe the situation is different with today's tech companies," analyst Zane Chrane wrote in the note to clients.
He continued: "In contrast to many large industrials and conglomerates, today's largest tech companies tend to 1) be the biggest drivers of innovation and value creation such as automation and machine learning, and 2) they benefit from much stronger network effects than traditional companies."
With all of that established, are there any stocks that jump out to Bernstein as particularly cheap, even considering all that's going on?
To answer this, the firm turns an eye to the software sector. According to Chrane, this area is unique in that it's actually a bit pricier than it was in 1999. But that doesn't mean there aren't opportunities.
He highlights two stocks in particular - Micron Technology and Western Digital - which he says look attractively priced. As you can see below, they're cheap according to five out of 10 measures assessed by the firm.
Bernstein