Top Stories
Top Stories

NYU professor explains how to value tech stocks

Paint the technology sector with the same brush at your own peril, warns a finance professor.

"Older technology companies are behaving very different from the younger technology companies," said Aswath Damodaran, professor of finance at the Stern School of Business at New York University

He breaks down tech companies by founding age, dividing them into categories such as young, teenage, aging and old tech. His own portfolio shows a mix of tech companies across age groups. He owns both Apple and Microsoft, companies he'd categorize as "aging tech." And until recently he had Twitter (young tech) and Oracle (very old tech) too.

"At the right price I'll buy any company," Damodaran said.

Under 10 years refers to young tech, 10-20 years is teenage tech, 20-30 years is aging tech and more than 30 years is old tech under Damodaran's classification.

When is the right time to buy? Technology's outperformed the broader so far this year, taking stock valuations higher along with it.

Above: S&P Tech vs S&P YTD

But patience brings you surprise opportunities to buy into young tech companies on the verge of growth at a reasonable price. This happens when investors dump such stocks on any adverse news.

For example, six months into Facebook's IPO the stock dipped to $18 because of investor monetization concerns. Sensing opportunity, Damodaran bought when others sold. There's always a phase in every young tech growth company where you can latch on, he says.

Exercise caution though because some young tech companies are "on the road to doom," Damodaran said. Differentiating between them is key. Low price with high valuations may indicate early doom when coupled with general business factors, he says.

Every rule has exceptions. Some tech companies that don't act their age, and have the "fountain of youth," said Damodaran. Put Amazon, Apple (after Jobs' death) and IBM (post-Lou Gerstner) into this basket.

Damodaran knows his age-based valuation classification for technology stocks allows such ageless companies to slip through the cracks. And he's OK with it because finding a tech company that can successfully reinvent itself the way Apple and IBM have is easier said than done. He pointed to the failed bets investors made on Yahoo in 2012, when many though a new CEO would turn around the company.

"It's tough for tech companies to reinvent themselves."