What's Wrong With Tech?

Maturation, Stagnation

So what's the matter with technology stocks?

The conventional analysis fingers two culprits:

The technology sector has matured, and sales and revenue growth have slowed.

Even after the huge selloff in the sector that began in March 2000 and ran through the first part of 2003, technology stocks are still overvalued, especially in light of the slowdown in sales and earnings growth.

Dell(DELL Quote), which reported earnings on Feb. 16, is a good example of both problems.

The company managed to beat Wall Street earnings estimates of 41 cents a share by 2 cents. Earnings grew by 16% year over year.

But the positive earnings surprise didn't survive even the usual cursory Wall Street analysis. A lower-than-expected tax rate -- the result of more of Dell's sales taking place in lower-tax countries -- was responsible for a penny of the surprise. And 2 to 3 percentage points of the company's growth resulted from the 2006 quarter running a week longer than the 2005 period.

And the earnings report turned positively gruesome when Dell started to talk about the rest of 2006. The current quarter, Dell CEO Kevin Rollins said, would show revenue growth of just 6% to 9%. That's big bad news at a company that grew revenue by 18%, 21% and 16%, respectively, in comparable quarters in 2003, 2004 and 2005. Earnings, the company projected, would be 39 cents to 41 cents for the quarter, flat with the January quarter and only 5.4% to 10.8% ahead of earnings for the April 2005 first quarter.

If growth in revenue and earnings is slowing to a single-digit pace, then Dell's shares at $30.38 aren't exactly cheap, even if they are down from a high of almost $42 in July 2005. After a decline of almost 28% from that date, the shares are still trading at 23.6 times trailing 12-month earnings per share.

That's certainly not a bargain price if Dell is growing earnings at 12%, as Wall Street now projects for fiscal 2007 -- or maybe less if the downturn projected by the company for the April quarter lasts longer than just a quarter.

OK, that's the conventional explanation of why technology stocks can't get a rally going. Earnings growth in these mature businesses is too low, and the stock price is still too high -- given that slower growth.