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TheStreet Open House

Expensive Technology Stocks Offer More Peril Than Promise

Stocks in this article: EBAYAMZNFBLNKDEBAYTWTR

SEATTLE (TheStreet) -- The first time I saw the movie, Napoleon Dynamite, I walked out of the theater before the final wedding scene. This caused me to miss Napoleon's brother Kip singing "Always and Forever" to his new bride, LaFawnduh.

The key line in the song was, "I love technology, but not as much as you, you see!" Kip found LaFawnduh "in a chat room," which indebted him to technology.

It seems the US stock market, as represented by the S&P 500 Index , falls in love with technology even when it is not finding LaFawnduh. The newness and wonderment associated with technology creates a disconnection with the purpose of a business. For the sake of our discussion, LaFawnduh is revenue which generates profit and free cash flow. It's important to remember that the purpose of a business is to meet an economic need and to generate profit for shareholders in the process.

It's hard not to noticed that lately clouds, eye balls, Tweeted selfies and technology of all sorts have become the stars of the show. Profits and free cash flow have taken a back seat to the excitement over what could be, but might never be.

In a way, Kip loves the possibilities of technology more than he loves LaFawnduh, the wonderful byproduct of his time spent with technology.

An extreme historical example might be helpful. In 1999, there was a public company called eToys. U.S. investors were jacked up about the untapped potential of the World Wide Web, though they lacked any evidence which companies would be mostly to survive and thrive. At that time, EToys had about $41 million of sales and was losing millions of dollars. Nonetheless, it had an $11.4 billion stock market capitalization near its peak.

Elsewhere in the marketplace, Toys-R-Us were posting $11 billion in revenue, annual profits of $300 million, yet could only muster a $2.5 billion market cap. As we know now, the stock market loved the possibilities of the Internet more than it loved profits and free cash flow (LaFawnduh).

Does the current affection for technology hint at a similar disconnection?

Amazon (AMZN) has revenue and revenue growth with little profit and little free cash flow in relation to its capitalization. Facebook (FB) has eyeballs (including mine), Twitter (TWTR) has tweeters (including Smead Capital), LinkedIn (LNKD) has users (including me). The question we ask is do they have profits now and in the future which will justify their current stock prices?

In other words, is there any chance of finding LaFawnduh via the technology? Can they make us "salivate" over existing and future profits and free cash flow?

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