Confused by tech? Join the club
Silicon Valley is either back, or it's not. Does that make any sense?
October 17, 2003: 3:47 PM EDT
By Adam Lashinsky, CNN/Money Contributing Columnist
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MENLO PARK, Calif. (CNN/Money) - The last time chip maker PMC-Sierra made money, in the first quarter of 2001, the world was a different place. The stock-market collapse was young, many of us held different jobs, and investors were still willing to own shares of companies whose products they didn't remotely understand.
So how much has changed? Fortunes were lost, smaller pools of money in retirement plans were sliced and diced, and investors allegedly became cautious.
And yet, here we are in late 2003 with tech stocks roaring, previously profitless companies reporting earnings and, as before, media and market pundits chewing their fingernails over what looks an awful lot like another tech-stock bubble.
Let's take one company, PMC-Sierra (PMCS: Research, Estimates), as an example to illustrate that this stuff is as hard to get right as ever.
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As noted, PMC last showed profits in April 2001. Its stock then stood around $45, giving the broadband-chip company a valuation of about $8.1 billion, or nearly 17 times its sales. Even then, its earnings, minus special expenses and gains, were nothing special. In the first quarter of 2001 PMC had pro forma earnings of $4.4 million. Annualize that and you had a company trading at about 450 times earnings.
Everything looks obvious in hindsight, but that valuation ended up being a terrible red flag. The stock fell below $3 a year ago before beginning a stunning recovery to Friday's post-earnings price of more than $16.
Where are we now? PMC's annualized sales are about $260 million, a little better than half where they were was the last time it was making money. Earnings are negligible: $846,000 after you strip out special gains. The valuation at $16 per share: $2.8 billion, or roughly 11 times sales.
So here are two equally plausible ways of looking at the stock and, in a larger sense, the rest of techdom:
You could be extremely bullish. PMC is on the upswing now after having survived the depths of darkness. Its stock is worth 64 percent less than the last time it made money, but it's not as overvalued now as it was then on a price-sales basis.
You could argue that PMC has momentum on its side. The company is forecasting that fourth-quarter sales will be better than third-quarter sales. Sequential growth is just what excites go-go investors. And if nutcases paid 17 times sales (and more) once upon a time, perhaps they will again.
You could be bearish. Investors have given a nearly $3 billion valuation to a company that barely makes money, that has shown to be fragile before and that participates in an industry marked by brutal competition. To make a somewhat absurd but illustrative comparison, PMC-Sierra's market value is about the same as Abercrombie & Fitch, which has annual sales of about $1.6 billion and earnings of more than $200 million.
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Some look at numbers like this and remind themselves why they refuse to invest in technology stocks at all. Well, here's a different statistic. In the last 12 months the Nasdaq composite is up a spectacular 51 percent. The S&P 500 Index is up a respectable but not nearly as exciting 19 percent.
The lesson is this: Ignore tech and you pass on the big opportunity. Become too enamored with tech and you risk having again what happened last time. Keep it in perspective and you'll be okay. Make sure no individual tech winner or fund becomes too big a part of your overall assets.
Because trust me, nobody, but nobody, knows where these valuations are going.
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Adam Lashinsky is a senior writer for Fortune magazine. Send e-mail to Adam at lashinskysbottomline@yahoo.com.
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