The Cash Tech Companies Are Stockpiling: $700 Billion

Technology companies have been hoarding cash. Todd Coupland, an analyst at CIBC World Markets, estimates that U.S. companies could top $700 billion of cash on hand in 2011, making tech the most cash-rich sector after financial services. Apple alone is sitting on about $82 billion in cash and marketable securities. At the same time, value investor Warren Buffet has been uncharacteristically buying up shares in tech companies. He recently spent more than $10 billion to buy a 5.5 percent stake in IBM. Buffett also bought positions in Intel and DirecTV.

Big cash holdings by technology companies suggest they may be undervalued. The tech sector has a current price-earnings ratio of 13.6, based on the past 12 months' earnings--about 8 percent above the S&P 500 Index average P-E of 12.6. If you strip out cash holdings from the analysis to weigh just the value of the core businesses of tech companies, their stocks actually trade at a discount to the broader market. Apple, Intel, Microsoft and Dell, for example, trade at a cash-adjusted price-earnings ratio of less than 10.

Some investors, such as Buffett, see an opportunity to buy technology stocks. Beyond cheap valuations, a portfolio of proven tech companies can also provide investors with a certain steadiness because tech is now an integral part of business and life. Buffett, for instance, cited IBM's entrenched position as a provider of critical technology services as the best reason to buy Big Blue.