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Is The Tech Sector Over-valued?


Good new technologies are a bit like good new roads: their social benefits far exceed what any one person or company can get paid for creating them.

-- Michael Lewis, author of Liar's Poker


How much more upside potential is there after a 67% monster rally for the technology sector? After all, there are resistance levels the market tends to respect. With slashed semiconductor demand, weak earnings reports from Dell, and an uncertain holiday shopping season ahead, is the tech sector overvalued?


Top 10 Technology ETFs by Assets


Fund Name TickerNet Assets Earnings Growth Rate ttm

PowerShares QQQ QQQQ16.22B15%

Tech Select Sector SPDR XLK3.73B11%

iShares Dow Jones US Tech IYW1.26B13%

UltraShort QQQ ProShares QID1.07BN/A

Semiconductor HOLDRs SMH968.79M14%

Vanguard Information Tech VGT736.15M13%

iShares Dow Jones US Telecom IYZ453.34M6%

iShares S&P Global Tech IXN375.14M13%

iShares S&P North Amer Tech IGM372.86M13%

Internet HOLDRs HHH350.48M15%


Top Holdings in Tech ETFs


I compiled the 6 largest tech ETFs top 10 holdings and their percentages of assets data collected from Yahoo Finance. While QQQQ is not a technology-specific ETF, it tracks a tech-heavy index -- the Nasdaq 100. These ETFs are more or less the same: they all include the same tech giants such as Apple, Cisco, Google, Intel, Microsoft and Oracle, etc.


Company SymbolQQQQXLKIYWVGTIXNIGM

Apple Inc. AAPL14.98.19.07.36.98.1

AT&T INC. Tn/a7.8n/an/an/an/a

Cisco Systems, Inc. CSCO3.16.67.56.45.56.6

E M C CP EMCn/an/a2.01.5n/a1.7

Gilead Sciences, Inc. GILD2.7n/an/an/an/an/a

Google Inc. GOOG4.75.86.55.34.95.8

HEWLETT PACKARD CO HPQn/a4.64.85.24.65.5

Intel Corporation INTC2.54.66.05.44.55.4

INTL BUSINESS MACH IBMn/a7.78.87.96.57.7

Microsoft MSFT5.19.811.39.48.38.8

Oracle Corporation ORCL2.84.04.24.53.33.9

QUALCOMM QCOM5.8n/a4.03.83.13.7

Research In Motion RIMM2.5n/an/an/an/an/a

Samsung SSNLF.PKn/an/an/an/a4.2n/a

Teva Pharmaceutical TEVA2.4n/an/an/an/an/a

VERIZON COMMUN VZn/a4.2n/an/an/an/a

% of Total Assets46.563.364.256.951.857.1


Tech Sector is Fairly Valued


Below are the major tech companies fundamental data. Even though their average trailing P/E of 31 is too high, their forward P/E of 18 is reasonable.


Company SymbolP/EForward P/E 1yrPEGP/S

Apple Inc. AAPL32211.44.9

Amazon.com AMZN76512.72.6

Cisco Systems CSCO24151.63.9

Dell DELL15111.30.6

E M C CP EMC34151.42.5

Google Inc. GOOG37221.28.0

HEWLETT PACKARD HPQ17121.21.0

Intel Corporation INTC47132.43.3

INTL BUSINESS MACH IBM13121.41.8

Microsoft MSFT19141.54.7

Oracle Corporation ORCL20131.24.9

QUALCOMM QCOM47181.27.2

Research In Motion RIMM17120.8N/A

Average31181.53.8


Mobile


Theres been a significant jump in the number of people using mobile devices to access the Internet and even Dell has officially announced its entry into the Smartphone market. Mobile Internet ad spending is also expected to increase four-fold over the next 5 years. Google continues its expansion into this area. Its sponsored listings have started to appear on the iPhone.


However, the mobile internet user experience is not enjoyable because of small screen size, slow text input, and download delays. An iPhone owner can use 10 times the network capacity used by the average Smartphone user. The result is dropped calls, spotty service, delayed messages, and glacial download speeds as AT&T's network strains to meet the demand, according to the New York Times.


Online Retailers & Search

Consumers are increasingly plugged-in to online retail research and deal hunting. The economy and unemployment will accelerate their thrifty behavior.


Many companies employ search engines as not only the top method of attracting new customers, but also it is the most efficient channel for doing so. Google keeps expanding its universe: Google Commerce Search is its first significant foray into site search for retailers.


With a forward P/E of 51, Amazon seems overpriced. Its Kindle is going to be challenged by Sony SNE, which plans to grab 40% market share in 2012 for its electronic reading devices.


Software vs. Hardware


The business models for hardware and software are fundamentally different. In hardware, you can always hope to invent your way out of any jam and keep the growth engines going. For example, Intel may be able to keep up with the "double performance every 18 months", or so called Moore's Law. In software, you need to get an early lead because winner usually takes all. Google is entering the operating system game with its upcoming Chrome OS.


Conclusion


Investors have access to the same information. They invariably head for the exits at the same time. Economic expansion might slow to a crawl. Recovery may turn out to be tepid. Nonetheless, innovation is the key to bring in solid earnings, even in a slow-growth economy.


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