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Mathew Ingram

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Going for growth

Mathew Ingram


TORONTO (GlobeinvestorGOLD) — So you’ve got $10,000 (in U.S. dollars, presumably) to invest any way you want. Here’s a suggestion that might be a little controversial: technology stocks.

In a way, tech stocks don’t seem all that controversial as a place to put your investment dollars. After all, stocks such as Google Inc. have captured the market’s attention more than just about anything else over the past six months, and everyone seems to have an opinion about Yahoo, Microsoft, Amazon or eBay.

In addition to that, some pretty big technology stocks are still down by as much as 30 per cent from where they were at the beginning of the year, including chip-maker Intel, software seller Microsoft and network-equipment maker Cisco Systems. That suggests the potential for some investing upside, provided the U.S. and global economies pick up a bit of steam over the next year or two.

So what makes technology controversial as an investment? A couple of things. In the case of Intel and Cisco — and similar companies such as chip-maker National Semiconductor or networking gear maker Lucent Technologies — the problem is a backlog of products that has stalled growth or at the very least eaten into profit.

Inventories have swelled because demand hasn’t grown as fast as expected, and there are those who think that will continue. That’s a big question mark.

For stocks such as Google, Yahoo or eBay — or homegrown success stories such as Research In Motion — the problem is even simpler. These stocks are trading at such astronomical multiples of future (that is, estimated) profit that they are more like nitroglycerin or some other unstable chemical than they are an investment. Handling them might be no trouble at all, and might even help your portfolio, the way nitroglycerin helps your heart. Or, they might explode, leaving just a few shattered bits and pieces.

On-line auction site eBay is trading at more than 100 times this year’s profit and almost 70 times next year’s estimates, and over 24 times its revenue per share. Yahoo is at similar multiples: 96 times this year’s profit, 72 times estimates and 15 times revenue. Google is selling for almost 200 times its profit over the past year, about 50 times next year’s projected profit and about 17 times sales per share. RIMM is at 90 times last year’s profit and 35 times next year’s, and 17 times sales.

Stocks that sell at those kinds of levels are effectively "priced for perfection." So long as they continue to increase their revenue and profit by 30 or 40 or 50 per cent every quarter, as most of them have been for the last little while, then investors will be more than willing to pay the kinds of prices they have been. But if they stop doing so, for whatever reason, then their shares could come under a substantial amount of pressure very quickly. That’s what makes them a risky bet.

But you’ve got $10,000 you don’t really care about, right? That’s what makes tech stocks so perfect as an investment (or a gamble, if you prefer). At the moment, they have one big thing going for them that lots of other stocks don’t, and that is growth — and plenty of it. It’s true that other market groups have been doing well too, in particular the commodities such as oil and gas or steel and copper. But technology stocks — and in particular Internet-based businesses such as Google — are growing faster than any of those areas.

Could they hit bumps? Sure they could. If an acquisition goes bad for Yahoo or eBay has a scandal of some kind, or Google is hit with a patent lawsuit (the kind RIMM is fighting) then that could hit their stocks hard. They are also subject to the same kinds of economic vagaries as any other stock — if the U.S. or global economy gets hit, so do tech stocks. But they likely won’t get hit as hard, if only because Internet businesses don’t have high costs and are fairly mobile.

In the end, the best investments are where the growth is, and that still means Google and Yahoo and eBay. It’s an open question whether that kind of growth will continue for the next three or four or even five years — but you’ll have cashed out long before then anyway, right?

Mathew Ingram joined The Globe and Mail's online news team in June of 2000, after spending four years as the Western business columnist, based in Calgary.

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