Tech stocks have a reputation for being overly prone to hype, and a business model with a heavy focus on market share over profits makes value investors wary. But that reputation is largely undeserved, and can be attributed to memories of the 1990s tech bubble and companies such as Twitter Inc (NYSE:TWTR) whose valuation is based on speculation of future profits. Artisan Partners Asset Management Inc (NYSE:APAM), a bottom up value investment fund that makes no effort to allocate funds to any particular sector, currently has about a third of its assets investments in the tech sector.
“Many of the start-up technology companies in the 1990s were primarily focused on rapidly building market share around new and largely unfamiliar concepts and/or technologies, which typically required large amounts of capital expenditures,” according to a recent Artisan Partners Asset Management Inc (NYSE:APAM) report. “Unproven business models were the norm of the ‘growth over profits’ mentality as companies tried to expand their customer bases as quickly as possible at the expense of revenues, profits and earnings.”
Tech companies now boasting strong balance sheets and low leverage
Artisan’s analysts note that much has changed since the 1990s, and the tech sector is full of companies with strong balance sheets, low leverage, and “undemanding” valuations that simply haven’t generated as much investor enthusiasm as their competitors.
Tech sector’s historic premium
Even better, the tech sector’s historic premium has fallen over the last few quarters to bring it more in line with the rest of the market, even though the potential for strong innovation-driven growth still exists.
Artisan Partners: Apple and Oracle combine value and quality
Artisan Partners Asset Management Inc (NYSE:APAM) typically looks for cash-producing companies with a strong balance sheet and valuations around 8-12X earnings. Even with those classic value-investing criteria, the fund is still putting money into high quality tech companies.
They give the example of Apple Inc. (NASDAQ:AAPL), who has been selling at a low double-digit multiple by their estimation, and is “growing faster than the market, has a higher dividend yield, has a significantly above-average financial profile and yet trades at a large discount to the market.”
The reports argues that Oracle Corporation (NYSE:ORCL), the world’s second largest software firm, is in a similar situation, with a high return on equity, strong market position in a field with high barriers to entry, and strong margins. “The company is financially quite strong with around $15 billion in net cash on its balance sheet. Shares sell for about 11X free cash flow before adjusting for its sizable cash position, which is near a historic low valuation.”