3 Reasons Why We Won't See a Tech Bubble (Update 1)
NEW YORK ( TheStreet) - Now that Apple(AAPL) has crossed $500 per share, Microsoft(MSFT) has crossed $30 per share again, and seemingly every story has an "iAngle" to it, there has already been some chatter about another tech bubble.
Morgan Stanley (MS) , in a recent report, highlighted the run-up in mega-cap tech valuations, asking whether this is the precursor to a bubble.
Morgan notes that 20% of the market cap of the S&P 500 is in technology, but says that mega-cap technology stocks are more attractive than other mega-cap stocks in other sectors.
The report goes on to say that tech valuations are not stretched, and sectors like "software, hardware, and Internet stocks are more relatively attractive then semiconductors or IT services..."
Here are three reasons why technology stocks are not in a bubble.
Broken down into subgroups such as communications equipment, software, semiconductors, Internet software, and IT services, only IT services has a beta lower than than its historical norm, and none are more than 9% away from a beta of 1. A beta below 1 indicates the sector is less risky than the overall market.
Some might believe that the recent run up in the Nasdaq and technology-related stocks might lead to an expansion of the sector's "beta," or riskiness. Morgan Stanley notes that large-cap technology stocks have had a beta lower than 1 (0.97) since 2004.
Morgan Stanley makes the case that industrial companies, such as GE(GE) and Caterpillar(CAT) have a higher beta than technology itself. Morgan Stanley refers to the technology sector as "basically defensive."
Of particular note is the run in shares of Apple, which has a market cap of approximately $480 billion. About a month ago, Apple crossed the $400 billion mark .
Adding $80 billion in one month is incredible. To put that in perspective, Apple has added nearly the entire valuation of Facebook during that period .
Morgan Stanley continues to recommend buying Apple, as well as Microsoft, despite the recent run-up in the companies' shares. Apple is up 27.1% year-to-date, and Microsoft is up 21.1%, compared to a 13.2% return for the Nasdaq.
The investment bank notes that while Apple has added over $450 billion in market cap in the past ten years, companies like Microsoft, Intel(INTC) , Cisco(CSCO) , and Dell(DELL) have seen their market caps shrink significantly.
When stocks tend to run up sharply, their valuations start to get stretched. They become "expensive," on a forward-looking earnings basis, and this can cause a sell-off. Morgan Stanley, however, believes mega-cap technology stocks are still cheap on a forward-earnings basis, especially when compared to other mega-caps in other sectors.