After the tech bubble burst in 2000, the proverbial house cleaning of the speculative mess mercilessly swept aside the weak players, of which there were many. But as Nietzsche said, whatever doesn’t kill you makes you stronger. True for one’s soul, true for companies. Indeed, the tech survivors are a stronger, and in many cases smarter lot. Business plans are something more than the back-of-the-envelope variety that was infamous in the late-1990s in the dot-com boom. Meanwhile, the large, established tech firms in many instances have learned how to play the game with a nimbler hand.

In one corner of the tech landscape are the innovators of application, merging media with the Internet, computers with content. Among the leaders blazing a trail in this space are the likes of Google, Yahoo, Ebay and Amazon. Meanwhile, the suppliers of chips, components, and other tech gear are a chastened bunch, but arguably enlightened as well. The days of building supply a la the glut of fiber-optic cable in the ’90s with the hope that demand would soon follow has been replaced by a more sober-minded approach that’s as marketing savvy as it is profits seeking. Apple Computer’s success of late with its iPod series of digital music players comes to mind as the gold standard in this niche.
Tech-related business opportunities seem to have rebounded as well, or so recent news stories suggest. Ebay’s recent announcement that it would purchase Skype, the popular Internet phone-service provider, is an example. Meanwhile, Yahoo continues to forge ahead in trying to turn itself into a media firm of sorts, raising the bar on traditional media companies to respond. Then there’s Google, whose success in going public is the closest thing to a hot Internet story on par with the late 1990s, albeit with the revenue muscle to support the hype.
So why isn’t Mr. Market interested in tech stocks? Does the pain of the tech bust of a few years back still weigh heavily? Or is the world of technology still a volatile one where earnings growth is far less reliable than in, say, health care? Indeed, Microsoft, a former darling of investors, is showing a middle-age stupor. Having grown large and dominant, and arguably fat and lazy, it’s not quite sure what to do in the 21st century, as its meandering, at best, stock price of late suggests.
Survival, in short, doesn’t automatically translate into grand investment returns, at least not in the short term. Wall Street seems inclined to maintain a wait-and-see approach with tech stocks generally. Among the ten big-cap sectors that comprise the S&P 500, information technology companies have shed a bit more than 1% year to date through September 29, according to Standard & Poor’s, vs. a 1.3% rise for big-cap stocks generally, as measured by the S&P 500. Small-cap tech stocks have lost even more this year, posting a 3.4% loss through yesterday. Mid-cap tech equities have fared better, albeit just barely with a tiny year-to-date rise of 0.2% through September 29. Tech has survived, but the days of sexy returns have faded, at least for the moment.
You want sizzling performance? Energy’s your game these days. The energy sector for the S&P 500 has roared ahead by more than 42% this year through September 29. The gains are even more impressive among the small-cap S&P 600’s energy sector, which soared 62% year to date.
Are tech stocks destined to remain unloved? That depends on the tech stocks you’re talking about. Unlike some sectors, such as energy, where virtually everything is running higher, stock picking remains essential in the tech land. The biggest tech names in the S&P 500 serves as a reminder: In 2005, through September 29, Microsoft lost 2.9% while Intel rose by 4.7%. Divergence is also common elsewhere among the leading tech-savvy firms. Ebay, for instance, is down by 29% so far this year, and Yahoo’s off by more than 11%. Google, on the other hand, has climbed over 60%.
Diversity of return can be found in the smaller tech stocks too. Consider some of the more prominent names in the small-cap S&P 600. Among the Internet Software & Services group in the index, Websense posts a meager 1.7% year-to-date rise in 2005, while Digital Insight’s climbed over 40%. Even among the nearly 300 so-called technology mutual funds in Morningstar’s database show a penchant for varied results. For the year through the end of August, the extreme ends of total returns range from 12% down to -13.6%.
Perhaps it’s all a reflection of the volatility that defines tech. Today’s giants are threatened by some wiz kid working in his garage. Big Oil, by comparison, never loses a wink of sleep over such things.
Technology is in the end about choice, change, evolution, and reordering the rules. Therein lies its opportunity, as well as its risk. Meanwhile, there’s choice, and plenty of it, for both consumers and investors. It’s hard to imagine a sector where indexing has lesser appeal than in tech.