Ed. Note: This was originally published at lyonsasset.ca on January 12, 2012:
I have come to the seemingly ridiculous conclusion that there is no such thing as a "tech stock." Since there are obviously companies like Google, Microsoft, Oracle and Apple, it would seem that I am off my rocker. These companies clearly operate in the technology field, either through the sale of hardware, software or a combination. Would they not then qualify as "tech stocks?"
Yes, but no. And, in my opinion, yes in the less relevant manner, no in the relevant manner. Yes, I agree, there are a number of publicly-traded companies that do business in the technology sector, making them tech stocks in the same way that Kraft is a food stock and Exxon is an energy stock.
But the answer is really no in the sense of what it used to mean to be a tech stock. Back in the late '90s, when the term "tech stock" really came into vogue, it wasn't merely used to segregate companies into which general segment of the economy they operated within. Rather, it was a term of complete differentiation. Tech wasn't one of a number of important sectors of the economy. Rather, tech was a completely new form of economic activity, one which not only possessed explosive growth but whose growth could be extrapolated out "as far as the eye could see." Growth projections were so fabulous that there was no real necessity to have a business plan that generated earnings, cash flow or often even revenues in the here and now. Rather, for "tech stocks," their field of activity would grow at such prodigious rates that, for the present, "valuation" metrics such as page hits and eyeballs would suffice.
To some extent, this was all understandable. There is no doubt that technology has experienced tremendous growth and advancement over the past decade-plus and it has greatly increased our efficiency and range of options in many activities. Those who foresaw almost unbounded pending improvements were essentially right, at a macro level.
The big problem was applying the sort of pie-in-the-sky optimism that could evolve out of the big picture to the micro, or company-specific level. That, and forgetting that company valuation will never be anything other than a convoluted discounted-cash-flow process. Oh, and that capitalism abhors a monopoly and competitive pressures can transfer the majority of the benefits of technological improvements from the producers to the consumers of the technology.
Unfortunately, the euphoric moment provided companies by the market in the late '90s and early oughts led to an environment of poor corporate stewardship in the technology sector. Dividends were eschewed, almost being considered a negative, as only old fuddy-duddy companies without infinite growth prospects could afford to distribute cash flow to non-employee shareholders. Stock options were considered free money and handed out willy-nilly to (mostly) senior management. As long as shares kept climbing, though, much like a Ponzi-scheme, no one understood that true shareholder value was being transferred from non-employee-shareholders to the supposed stewards of corporate capital. And beating the street seemed to be of greater importance to the companies than putting in place viable long-term business strategies.
The reality is that the underlying mindset that allowed for these misguided priorities, the belief that "tech stocks" were a different animal than the rest of the stock market, one with never-before-seen growth prospects and inviolable business moats was an errant one. In fact, it turned out that the technology sector wasn't that much more attractive to long-term investors than the airline sector given the short periods of technological superiority accorded to any one company. While the Dow and S&P 500 today languish 10-20% below their all-time peaks, the NASDAQ Composite remains at closer to half its blow-off high.
There's no such thing as a "tech stock." There never was. There are just companies, some of which operate in the technological fields. And those fields tend to be more difficult to operate in than others, as it turns out. To the extent that one could believe that there are "tech stocks," it would seem to us to be a reason to justify a discounted multiple for valuation purposes. But, then again, we're just old fuddy-duddies with a fetish for dividends and management teams friendly towards non-employee shareholders. And we'll stay that way.