US technology stocks cheapest since 1998 amid IPO bubble fear

The five-week drop in US stocks has driven technology company valuations to the lowest level in more than a decade, making them too cheap to pass up for some of the nation’s biggest money managers.

The largest group in the benchmark gauge for American equities lost 7 per cent through June 3, or about $190 billion in value, since the market peaked on February 18, falling more than any industry outside financials. Computer stocks trade for 9.3 times reported earnings before interest, taxes, depreciation and amortisation, 1.3 times the index’s multiple, data compiled by Bloomberg show. The ratio is the smallest since at least 1998.

While signs of a slowing recovery and the initial public offering of LinkedIn Corp. have spurred concern the industry has entered a speculative bubble, the numbers show something different. Profits will rise 35 per cent faster than the Standard & Poor’s 500 Index in 2011, and executives are boosting computer and software spending, data from Bank of America Corp and Bloomberg show.

“We see the best supply-demand trend in technology,” said Michael Sansoterra, a money manager at RidgeWorth Capital Management in Atlanta, which oversees $48.5 billion including Broadcom Corp and Google Inc shares. “You can measure it pretty much every way you want and it looks attractive.”

COMPUTER INDUSTRY EARNINGS
Computer-industry earnings are almost double the level at the peak of the Internet bubble. Profits for technology makers in the S&P 500 totaled $135.6 billion last year, compared with $72.9 billion in 2000, when the S&P 500 Information Technology Index reached an all-time high, according to data compiled by Bloomberg. Bank of America says corporate expenditures on equipment and software will increase 10 percent this year, about four times faster than US gross domestic product.

Per-share earnings at computer and software makers will climb 24 per cent in 2011, outpacing the 17 per cent increase for the S&P 500, according to projections from analysts surveyed by Bloomberg. Based on those estimates, technology companies trade for 12.8 times profit, compared with 13.1 for the S&P 500, data compiled by Bloomberg show.