Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Are Tech Stocks in a Bubble?

We’ve heard the b word a lot in recent discussions about technology stocks, and it is easy to see why. Some technology share prices have risen to ridiculous levels in recent months.

Some ludicrous tech stock prices include the following:

  • Priceline Group (NASDAQ: PCLN) was at $1,266.2 a share on August 20, 2015. This is a company that offers no dividend and had a free cash flow of $649.29 million on June 30, 2015.


  • Amazon  (NASDAQ: AMZN) had a share price of $519.32 on August 20, 2015, even though it reported a net income of -$188 million and a return on equity of -1.73% on June 30, 2015.


  • Netflix (NASDAQ: NFLX) was trading at $114.17 a share on August 20, 2015, despite reporting a free cash flow of -$228.67 million and a net income of $192.7 million on June 30, 2015.


  • Then there was the wishful thinker’s favorite: Tesla Motors (NASDAQ: TSLA), which had a share price of $246.49 on August 20 despite a net income of -$520.74 million, a diluted earnings per share figure of -4.128, a profit margin of -19.29%, a free cash flow of -$564.68 million and a return on equity of -59.66% on June 30, 2015.

As you can see, there is definitely some insanity in the tech segment that is indicative of a bubble, but it is not found across the board. There are some tech companies that are definitely undervalued.

For example, Microsoft (NASDAQ: MSFT), which was trading at $45.95 a share on August 20, 2015, reported a net income of $12.19 billion, a free cash flow of $5.035 billion, a revenue of $93.58 billion, a return on equity of 13.79% and a dividend yield of 2.03% on June 30, 2015. Also undervalued is Apple (NASDAQ: AAPL), which reported a revenue of $224.34 billion, a net income of $50.74 billion, a profit margin of 21.52%, a dividend yield of 1.76%, a free cash flow of $12.9 billion and a return on equity of 41.5% on June 30, 2015.

There Is No Tech Bubble

It looks as if there is no tech bubble; instead, there seems to be individual bubbles surrounding specific stocks. That situation does not look as dangerous as an across the board bubble, but it does indicate a far higher level of market volatility than is being reported.

One problem is that a few super stocks seem to be pushing up the market, while others are in the doldrums. Another is irrational emotion pushing demand for certain shares, such as Amazon and Tesla. Much of the success of those stocks appears to be built on people that like the idea of those companies rather than the actual businesses.

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As for Priceline, I cannot even begin to understand the high price for that stock. One possible explanation is a small share volume, although the share prices indicate that Priceline and do seem to be in bubbles.

Naturally, a lot of investors will be wondering if some of these tech stocks are now value buys. My answer would be yes, Apple and Microsoft are definitely value investments right now. Apple in particular actually seems to be underpriced given its revenue figures. Microsoft, on the other hand, seems to be on shakier ground.

Why Google Is Bubble Proof

Another stock that’s well worth checking out is Google (NASDAQ: GOOGL), which would seem to be more valuable because of the Alphabet reorganization. One reason why I like Google is its ability to resist market pressure and its willingness to concentrate on making money and growing the business while ignoring media hype. I think Alphabet will make it easier to do this and keep Google bubble proof.

It might also help Google avoid the pestilence known as activist investors that want to break the company up in the name of the fast buck. I have a strong feeling that Amazon, Microsoft, and Apple are all going to have a hard time fighting off those predators in the years ahead.

Despite some bubbly stocks, there is still a lot of value in tech. Google in particular looks like it might be a big money maker for decades to come. My prediction is that Google’s stock price will continue rising through the roof as high flyers like Netflix, Priceline, Amazon and Tesla go straight down the toilet in the near future.