Investors who have been around during the dot-com bubble remember it very well. Giant tech companies like Microsoft Corporation (NASDAQ:MSFT), Intel Corporation (NASDAQ:INTC) and Cisco Systems, Inc. (NASDAQ:CSCO) have been trading at imaginary price to earnings ratios of 55, 60 and 48, respectively.
Such P/Es are, of course, out of this world, and the imminent crash was just around the corner. Investors ran for the hills, sending shares of these tech giants tumbling down. In fact, shares of these three giants have been depressed for over a decade. That was a direct result of previous exuberant valuation combined with investors’ emotional distress and bad memories. But all of this is changing now right in front of our very eyes, and you should pay attention.
The conventional way to value these tech giants
Wherever you look, tech giants are trading on the cheap. All the names in the table below are dominant players in their respective fields. They have all made a ton of money each and every year during this lost decade, they all have fortress- like balance sheets, they all pay hefty dividends and buy back shares, and…. they are all trading at ridiculously cheap earnings multiples. Take a look at the table below.
|Cisco Systems ||10.0|
For Microsoft Corporation (NASDAQ:MSFT) and Intel Corporation (NASDAQ:INTC), two world leaders in their respective field, to be trading at single digit earnings multiple is out of this world. Actually, they’re as cheap as they have ever been in the past decade. But this is getting even better. I think these stocks are actually much cheaper than they appear.
A better way to value these businesses
Each and every one of these businesses is sitting on mountains of cash. In fact, the pile of cash is so large that it completely distorts their conventional P/Es. Take Cisco Systems, Inc. (NASDAQ:CSCO) for example. The maker of routers has $9 per share in pure cash. With shares changing hands at $20, that means that 45% of the company is cash that’s sitting in the bank and not utilized in the normal course of operations. Therefore, I believe that to size up the real value of Big Tech businesses, you should strip out their cash balances. Take a look at the table below: