Talk is cheap and so is tech. Even though the S&P 500 information technology sector has outpaced a gyrating market by more than a quarter since the start of 2009, tech stock valuations are in the doldrums. The sector’s 13 times prospective earnings multiple is not far from the 11 times trough of the financial crisis and a long way from the 18 times average of the past five years.
The reason is a remarkable recovery in profits, one that the market does not yet believe in. During the past year consensus earnings forecasts tracked by Bloomberg have risen by more than half. As consumer tech demand falters, businesses are expected to start spending again on hardware: PC purchases were postponed in 2009, and a new version of Microsoft’s Windows is prompting action. Consultancy Gartner expects global hardware spending (two-thirds of which goes on PCs) to rise 9 per cent this year to $365bn.
Evidence of such a rebound in the results season so far has been mixed but encouraging. Intel had a record quarter, and Microsoft has sold 175m copies of Windows 7 already, its best ever product launch. IBM’s hardware business registered only a 3 per cent bump in sales for the second quarter, a poor result for a division that was down by a quarter in the same period last year. But this more reflects the company’s own product cycle than wider problems. Unit sales for the server industry were up 28 per cent in the second quarter.