Tech Stocks Often Rise and Fall Together. They Shouldn’t. | Free Press from USA

Tech Stocks Often Rise and Fall Together. They Shouldn’t.

Tech Stocks Often Rise and Fall Together. They Shouldn’t.

Even the newspaper industry — which used linotype machines and pneumatic tubes when I started as a copy boy in the 20th century — has a lot in common with tech companies. Like Netflix and Spotify, for example, The New York Times and The Washington Post use streaming technology and data analysis to feed information and entertainment to growing armies of digital subscribers.

“On the day that, say, 60 percent of profits and revenues come from digital sources, do we reclassify these companies as tech companies?” Professor Damodaran asked.

Similarly, he compared Tesla, which makes electric cars and is widely viewed as a tech company, with Ford and General Motors. Should Ford and G.M. be categorized as tech companies, too, when the bulk of their revenue eventually derives from electric vehicles?

He is not suggesting that every company will need to be called a tech company. Perhaps none of them should. But, certainly, we should be more careful about describing — and valuing — those that now seem pre-eminently in the tech mold.

Tesla and IBM are at two ends of what Professor Damodaran calls the tech company life cycle.

As an infant company, Tesla poses a valuation challenge. Assessing the value of a stock typically starts with an assessment of earnings and cash flow, but that requires imagination with Tesla because it churns out annual losses, not earnings. Yet investors in the stock market collectively say Tesla is worth about $60 billion, more than G.M. or Ford, which make profits.

Will Tesla become profitable enough to justify its current price? Professor Damodaran believes its shares are grossly overvalued. “But it’s hard to know with a young company,” he conceded, adding that Tesla is “a risky proposition but not an impossible one.”

Old profitable companies like IBM are easier to value. The stock market says it is worth about $110 billion, based on a price-to-earnings ratio of 8.4. That ratio is less than half the level at which the average stock trades, presumably because IBM hasn’t been growing rapidly and, by some metrics, has been shrinking.

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