The pundits agree. It's a technology bubble. And all because social media stock LinkedIn (Nasdaq:LNKD) now trades with a P/E of 600 on a paltry $15 million in trailing earnings.
That's a pretty rich valuation, to be sure. We could even call it ridiculous. Absurd. But a sure sign that the stock market is overvalued and headed for a crash? That may be stretching it a bit.
The Nasdaq 100 (NDX), which is comprised of the 100 largest companies on the Nasdaq, is currently trading with a trailing P/E of 12.5, according to the Wall Street Journal. Surprised? For all the "tech bubble" talk, you'd think there would be a greater disparity between stock prices and earnings.
Now, simply looking at an index valuation doesn't always give you a complete picture.
The Nasdaq 100 is a "weighted" index, which means some companies have more influence in its metrics. Like Apple (Nasdaq:AAPL). Apple used to carry a 20% weighting on the Nasdaq before it was cut to 12.3% in April. That means Apple still has a strong influence over the Nasdaq 100's valuation.
Apple is also cheap, trading with a forward P/E of 12. Of course, we could argue whether Apple can continue to fire on all cylinders. But I wouldn't bet against Steve Jobs and Co.
Google (Nasdaq:GOOG), Intel (Nasdaq:INTC), Microsoft (Nasdaq:MSFT) and Oracle (Nasdaq:ORCL) round out the remaining top weightings on the Nasdaq 100, accounting for another 25% of the valuation. Google has the highest forward P/E of this group, at 13.
So that's 5 companies that account for 37% of the Nasdaq 100s valuation. Even though the largest stocks on the Nasdaq 100 are reasonably priced, it doesn't give us a very accurate picture of technology stocks.
If we dial down into smaller groups of tech stocks, we will find some pretty rich valuations. The so-called "cloud computing" stocks, for instance, look pretty expensive. And some of the emerging market Internet stocks look expensive, too.
But overall, it's tough to argue that there's a bubble in tech stocks. And if you really do your research, you can find tech stocks that are key players in the strongest growth areas of tech that are very attractive.
(If you're interested, I am currently recommending a $6 stock that's about to unleash a revolutionary wireless antenna technology that will save Verizon and AT&T hundreds of millions of dollars in network upgrade costs. You can access my Special Report on technology HERE.)
On the first day that shorting its stock was possible, LinkedIn…rallied, from $85 to $95. I had a feeling that would happen. It's commonly said the stock market's job is to make as many people wrong as possible. It's also been said that valuations can remain irrational longer than any investor can stay solvent.
We should always remember that the stock market is about making money. As much as we may try to understand and explain the market with numbers (like P/E and PEG ratios), it remains an emotional system where fear and greed count just as much as a P/E ratio.
No doubt there is fear in this market. Fear that the economy is slowing, fear that the EU is on the verge of implosion, fear that we could see a repeat 2008/2009.
I've often said that investors still suffer from a form of post-traumatic stress syndrome after the financial crisis. I think this is a primary reason that valuations remain reasonable at the same time we hear about stock market bubbles.
Of course, I'll never endorse wide-eyed optimism. But I'm no doom-and-gloomer, either.
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