This past weekend we argued that when the next bull-market arrives, the type of companies traditionally known as “tech” will not lead the way.
The problem is that they’re old with big bloated products and business models to defend. Meanwhile the dearth of tech IPOs means the young upstarts, the companies that might’ve been Microsoft (MSFT) in 1986, aren’t public yet, so there’s nobody to lead the charge.
Contra that opinion, Breakingviews argues that cash-rich tech stocks are the way to go:
Apple (AAPL), for example, trades for just under 10 times its projected operating profit for 2009. This multiple means investors think its underlying business will more or less stop growing – a pretty farfetched idea. The economy may be in dire shape and Apple’s goods pricy, but the odds are that demand for its gadgets will not permanently plateau.
Pessimism over Cisco (CSCO) is even worse. It trades at a mere six times operating profit. That means investors think the earnings of the world’s biggest supplier of internet gear will shrink – an assumption hard to square with continued steady growth of web traffic.
There are plenty of others – internet company Juniper Networks (JNPR), software firm Autodesk (ADSK) and computer maker Dell (DELL) among them – that also look cheap after one strips out their cash.
Of course, as the column goes onto note, these companies either don’t pay dividends, or their dividends are tiny, meaning you’re trusting management to do something productive with the cash. That’s not guaranteed. For some of the older players, there will be a strong temptation to punt — to either reinvent the business from the inside or to make risky acquisitions that probably won’t work out. Paying out cash, acknowleding that they’re no longer the growth firms they once were, isn’t part of their DNA.