No Bubble for Tech Stocks

Microsoft is a deal, but some social media firms will go bust.

With Web-based startups flooding the market of initial public offerings and stocks of a few social-media companies reaching sky-high valuations, many investors may be experiencing a bit of déjà vu. But David Eiswert, manager of the T. Rowe Price Global Technology Fund (symbol PRGTX (opens in new tab)), says this is not a repeat of the dot-com bubble of the late 1990s. The following is an excerpt of our recent conversation with him.

KIPLINGER: Is there another tech-stock bubble on Wall Street?

EISWERT: No. Tech stocks could be due for a pullback, but if that happens, I’ll be buying. There are big opportunities for growth, thanks to new demand from developing nations, new trends in mobile and cloud computing, and the accelerating pace at which people are purchasing and using these new technologies. Tech companies are also sitting on the most cash held by any market sector, ever. Adjusting for these factors, tech stocks are cheap—especially large-company tech stocks.

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What about social media stocks? Do you see a bubble there? There will be some huge winners in social media, and other stocks will go to zero. The stocks look expensive based on their prices relative to company earnings, but some are more expensive than they look and some are cheaper, based on long-term prospects. We think LinkedIn (symbol LNKD (opens in new tab)) will be a winner. The company has 150 million users and a potential global market. Users could double in the next two to three years. How hard is it to imagine that every college student and working person will have a LinkedIn account?

Are there other good social media bets now? Which ones would you avoid? Angie’s List (ANGI (opens in new tab)), the consumer-review Web site, is attractive. The company has a great local-commerce database that it’s just starting to make money on. Groupon (GRPN (opens in new tab)) is riskier (see 6 Stocks to Sell Now). It’s not clear what the company’s competitive advantage will be and how much of the local-commerce market it can capture. Because its future is more uncertain, the stock is less attractive.

What are some of your other favorite tech com­panies now? Microsoft (MSFT (opens in new tab)) is cheap, and Windows 8, due out later this year, is a chance for the company to find new growth in the mobile-device market. We like Juniper Networks (JNPR (opens in new tab)), which lowers the cost of Internet traffic for AT&T and other telecom networks, and we like Informatica (INFA (opens in new tab)) and Tibco (TIBX (opens in new tab)), both of which enhance the flow of data, allowing investors to cash in on the explosion of information.

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Jennifer Schonberger
Staff Writer, Kiplinger's Personal Finance