Is The Tech Sector Going To Undergo Large Changes?

by: Elite E Services

Thursday last week, Google (NASDAQ:GOOG) experienced a sharp plunge after RR Donnely (NASDAQ:RRD) released bad numbers ahead of schedule. But as many have pointed out, Google's numbers were bad, even without the pre-release mistake.

This isn't an anomaly in the tech sector, recently the Facebook IPO (NASDAQ:FB) dissapointed investors, combined with an IPO tech glitch which had never been seen before in an IPO.

Is it time for us to take pause and contemplate; with the hype removed, what do these companies actually do?

What Facebook and Google have in common, they both provide free internet services to users with a paid option for advertisers. If you strip away their free component, they are an online software driven yellow pages / penny saver on steroids; looking from a revenue perspective. Of course they have taken it to the next level by targeting demographics and delivering ads specific to regions or based on other criteria. And the bid-click system is a far more sophisticated tool than advertisers had in previous generations. But is that sophistication worth $223 Billion (current market cap of GOOG)? The market says yes.

Facebook has yet to launch a successful revenue model, but investors tout the fact that Facebook has 'a billion customers.' But even Facebook itself says that roughly 8.7% of those are fake accounts. Other reports are much higher. Of course it's difficult to determine such statistics because most fake users try to act like real users. But you can easily test it yourself. Try to create different Facebook accounts, you will see it's easy to create 10, 20 or more accounts using similar sounding names.

The "Tech" sector is comprised of companies such as Google , Apple (NASDAQ:AAPL), Facebook , Amazon (NASDAQ:AMZN), and many others. But what 'technology' do these companies actually develop?

As the saying goes, IBM (NYSE:IBM) missed out on the PC, enabling the existence of Microsoft (NASDAQ:MSFT). Microsoft missed out on the search engine, enabling for the existence of Google . Google missed out on social media, enabling the existence of YouTube (now part of Google) and Facebook . All of these companies just as well may be a part of IBM .

IBM spends 6% of sales revenue on research & development, compared to Apple's 3%. IBM has been the largest global patent holder for 18 consecutive years, obtaining 5,896 patents in 2010 alone. IBM develops and manufactures mainframe computers, software, systems for the power grid, computers used by banks, systems for the military, and thousands of other products and applications critical to the functioning of our global economy. Apple doesn't manufacture anything, and produces products that if they didn't exist the global economy would continue to function. Yet, over the last 10 years, the share price of Apple has outpaced IBM by thousands of percent.

This line of reasoning was prevalent before the previous "dot com" boom, but as prices of companies that had no revenue and no product soared, the voices of such arguments were ignored and finally forgotten. These voices were not negative on tech stocks, they were merely skeptical of the continued growth of companies that were based on trends rather than substance.

The recent problem with Google , combined with the Facebook IPO disaster could be an omen for the future of the tech sector. Of course what is negative for these companies will likely be positive for others such as startups. But also we should look to companies such as IBM that invest heavily in research & development, who may be in a better position to capitalize on the next tech booms that will involve quantum technology, nanotechnology, robotics and other darpa released tech, or even alternative energy sources such as Helium 3.

In at least one of the above mentioned technologies, IBM is a corporate leader.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.