Tech is cheap for good reason
When comparing PE ratios against their historical averages its easy to see the tech industry as one of the most historically cheap sectors on the market. Single digit and even PE ratios lower than the teens are out of the ordinary for tech stocks which enjoyed triple digit multiples less than a decade ago and up until the market crash this year were trading for 20+ ratios.
We have to remember though that tech is so cheap because it’s a sector that is mostly driven by disposable income. Think consumer products and you’ll instantly start thinking through virtually all the tech products on the market. When consumers have little disposable income a $250 ipod or a $1000 laptop are hardly must have purchases. Though consumption by the average person is a large part of most tech company’s bottomline numbers, it isn’t the complete extent of their earnings.
Business to business purchases are also suffering as businesses are cutting jobs rather than adding them. Fewer employees means fewer desks and fewer computers. Look at DELL which has seen its business orders fall out of the sky from the previous levels.
Stocks like Google and Yahoo are also beaten from their highs. These stocks have huge exposure to businesses and the economy as their business model is dependent on advertisers. If internet users are spending less, advertisers will spend less for ads. And who knows, less people may be willing to pay $30 per month to even have access to the internet.
Tech stocks are disposable and they’re cheap for a reason. There is zero incentive for investors to be buying at these levels. I expect serious consolidation in the computing and tech industry as the economy shrinks the value of the tech industry to levels that can’t sustain multiple competitors.
