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As Internet shares break down, investors see value in old tech

By Ryan Vlastelica

NEW YORK (Reuters) - The last six weeks have been terrible for many technology shares, but not for the four horsemen that sat atop the last tech boom.

Intel, Oracle, Microsoft and Cisco, known as the four horsemen during the late 1990s technology boom due to their strong performance and leading market share, have all rallied since the beginning of March even as stocks of many other tech companies have been crushed.

These legacy names have emerged as an alternative for those who want exposure to the tech sector but are spooked by the slump in high-growth stocks like Netflix (NSQ:NFLX).

These older names have recently attracted more attention because their growth outpaces the broader market but they don't have the high valuations of the recent momentum favorites.

"They have high cash levels, nice profit margins, and when the economy returns, their cyclicality will be a positive," said Robert Stimpson, portfolio manager at Oak Associates Ltd in Akron, Ohio.

"That they're trading at a discount makes them something of a defensive play," he added. "I'd rather own them than something like utilities, which pay a dividend but offer little or no growth."


The change in sentiment can be seen in fund flow figures. The First Trust Dow Jones Internet ETF (FDN.P) has seen outflows of $43.86 million since the beginning of March, while the First Trust Nasdaq 100 Technology fund (QTEC.O) -- which counts Facebook (FB.O) as a holding but holds few other "momentum" names -- has seen inflows of $9.4 million over that same period, according to data from

While the likes of Netflix and TripAdvisor (TRIP.O) have lost more than 20 percent of their market value, putting them in bear market territory, Dow components Intel Corp (NSQ:INTC) and Cisco Systems (NSQ:CSCO) are up 5.7 percent and 3 percent, respectively, since the beginning of March. Microsoft Corp (NSQ:MSFT) is up 2.3 percent over that time and is trading near its highest levels since the dot-com bubble.

These stocks are considered undervalued by various measures, including StarMine's measurement of intrinsic value, which looks at anticipated growth over the next decade. Many of the high-flyers still look pricey, meanwhile.

Both Netflix and Facebook would still be above StarMine's intrinsic value measure even if their shares fell another 50 percent from current levels. However, IBM (IBM.N) is almost 40 percent under its intrinsic value, based on its Friday closing price, while Microsoft and Oracle are more than 20 percent under.

Another class of shares walloped in the recent selloff are "cloud" or Internet-software plays.

Human resources software provider Workday (WDAY.N) has given up 25 percent of its value over the past month. The sell-off has been more brutal on its peers: since mid-February, accounting services provider Netsuite (NYS:N) has fallen close to 30 percent, while analytics firms Splunk Inc (SPLK.O) and Tableau Software Inc (DATA.N) have both shed close to 40 percent of their value.

"We've seen a very vicious correction in March and April and it doesn't look like it's over yet," Wedbush analyst Steve Koenig said. "The sell-off was fueled by initially by profit-taking and then it became a momentum trade to the downside."

"The fact that the multiples had expanded so much just created the conditions for that trade to happen."

Valuations still look stretched. Workday, which has not reported a profit since it went public in 2012, is trading at close to 30 times sales. That compares to roughly 23 times for Splunk and 15 times for Netsuite. Inc (NYS:CRM), in comparison, has a price-to-sales ratio of 8.2.

Still, many analysts say the case for cloud software companies remains on solid footing. A report released this month by research firm IHS estimated that cloud-related spending will balloon to $235 billion by 2017 — up 35 percent from the $174 billion projected for 2014.

Straddling the line between growth and value is Apple Inc (AAPL.O), Wall Street's most valuable company. While the stock is trading well under its intrinsic value, it is well below record levels hit in 2012, suggesting investors remain skeptical that its shares have the ability to recover. The stock has slipped 1.3 percent since the start of March, underperforming other legacy names but far better than the Nasdaq's 7.2 percent drop over the period.

Mark Yusko, chief investment officer of Morgan Creek Capital Management in Chapel Hill, North Carolina, said Apple was an "in-betweener" stock.

"It has growth, but not as much growth as other tech names, while also not trading at the multiples of others," said Yusko, who oversees about $4 billion in assets and whose firm owns Apple. "It has the best of both worlds, and also the worst of both."

(Additional reporting by Gerry Shih in San Francisco; Editing by Jan Paschal and Leslie Adler)

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