Buoyant or Bubbly?
After online auction giant eBay Inc. reported blowout earnings on Apr. 22, its stock rose 5% the next day. That pushed its forward price-earnings ratio into the nosebleed zone, at 66. The situation is similar for other high-profile dot-coms such as Yahoo! Inc. and Amazon.com Inc. The Goldman Sachs Internet Index has risen more than 30% since the beginning of the year, compared with just 5% for the Standard & Poor's 500-stock index.
Have dot-com stocks gotten ahead of themselves? The answer from most equity analysts is "yes." And that goes for the rest of the tech sector, too -- though to a lesser extent. The Merrill Lynch 100 Technology Index has a forward price-to-earnings ratio of 30, just over the top of its normal range. "It's time for investors to take a breather," says Merrill analyst Zhen-Hong Fan.
We're not facing another tech crash. Many of the industry's stalwarts, such as Microsoft Corp. and Cisco Systems Inc., have p-e ratios in the safe 20s. But watch out for those dot-coms. They're in the high-risk zone.
By Steve Hamm