Santoli: Tech not cheap when you strip out Apple

Published Mon, Jul 25 20163:09 PM EDT

To the eyes of many seasoned investors, technology stocks look like a pretty sweet deal. In aggregate, the tech sector trades at a slight discount to the broad S & P 500 index valuation of around 17 times the coming year's earnings, despite tech's superior long-term growth and typically high profit margins. But any investor reaching for tech had better like the taste of Apple . Because Apple produces such an outsized share of all tech profits, has such a heavy weighting in the index and trades at such a depressed valuation, it makes the entire sector appear far cheaper than it is. Apple, which is due to report results for its fiscal third quarter on Tuesday, is projected to earn more than $47 billion in net income from the current quarter through next June. That's down from about $50 billion over the latest four quarters, but is still more than 20 percent of the entire tech sector's forecast profits over the coming 12 months. On a per-share basis, Apple's forward 12-month earnings estimate is $8.54, so at the current stock price of $97.35, the iPhone behemoth has a price-earnings ratio of just about 11.3. Even as the stock has languished and sits some 22 percent off its 2015 high, Apple's $540 billion market capitalization still accounts for around 14 percent of the entire S & P 500 tech sector. So, stripping out Apple and its about 11.3 times forward multiple leaves the rest of tech trading at 21.5 times anticipated earnings. That might seem not so expensive given Big Tech's huge cash holdings, strong balance sheets and strong global competitive positions. But it certainly works against the idea that the tech sector is somehow an orphaned, unusually cheap group. There certainly are other Old Tech companies with modest valuations, such as Cisco Systems and International Business Machines , at around 13 and 12 times expected profits, respectively. But the point stands: If you want cheap tech stocks, you have to overlook sluggish growth rates. If you want growth, you need to pay up. This is not a market that offers many cheap lunches, let alone free ones.

Dado Ruvic | Reuters

To the eyes of many seasoned investors, technology stocks look like a pretty sweet deal.

In aggregate, the tech sector trades at a slight discount to the broad index valuation of around 17 times the coming year's earnings, despite tech's superior long-term growth and typically high profit margins.

But any investor reaching for tech had better like the taste of Apple. Because Apple produces such an outsized share of all tech profits, has such a heavy weighting in the index and trades at such a depressed valuation, it makes the entire sector appear far cheaper than it is.