I keep hearing that technology shares are cheap.

The numbers seem to back that up. “Seem.”

Computer stocks trade for just 9.3 times reported earnings before interest, taxes, depreciation and amortization (EBITDA), according to Bloomberg. That’s just 1.3 times the multiple for the Standard & Poor’s 500 stock index for a whole. And that’s the smallest premium for computer stocks since Bloomberg’s data begins in 1998.

The price to earnings ratio for the companies in the information technology sector as compiled by Standard & Poor’s is just 14.8. The multiple for the entire index is 14.7. The 14.8 multiple for the information technology sector is the lowest multiple since December 2009.

And if you want to talk individual stocks, the numbers seem to make the argument even stronger. Cisco Systems (CSCO), one of the technology names to conjure with for decades, trades at a price-to-earnings ratio of just 11.5. Intel’s price-to-earnings ratio is just 10.2.

But, I’m sorry, I just don’t buy it.

I think technology stocks as a whole are pretty accurately priced. The big companies that dominate the sector, the names we all recognize, may even be slightly overpriced. And the true growth companies in the sector may be attractive buys on their growth but they sure aren’t cheap on their price-to-earnings ratios.

I think the whole “Technology stocks are cheap” argument fails to understand exactly how much the technology sector has changed from the good old days and how sweeping the revolution is that is now turning the sector upside down.

Let’s take a look at the assumptions in the technology is cheap argument. Read more

It’s not enough.

After all the breast-beating from Cisco Systems (CSCO) CEO John Chambers about the need for the company to restore credibility and refocus the company, investors get a decision to close the Flip video camera business and cut 550—about 1%–of the company’s employees?

This isn’t the major change that investors were hoping for. If you’ve been holding the stock in the hope that Cisco would announce a major reorganization that would address falling profit margins and increasing competition in its core businesses, it’s time to admit that current Cisco’s management just doesn’t get it. Take the loss and sell.

In his April 4 memo to the company’s employees CEO Chambers said that he would make several “targeted moves” to address Cisco’s problems. those problems include an acquisition strategy that saw Cisco start construction on too many new businesses—many of which had lower profit margins than its core routing and switching business.

The most obvious target in any reorganization was the company’s consumer business with such products as the Flip video camera and Linksys home routing gear. The Flip got a lot of well-deserved attention as a key sign of how badly off track the company was: Why invest in a stand alone video camera in a world when more and more consumers use their cell phones for video?

Today’s moves are barely a ripple on Cisco’s ocean of problems needing a fix. Read more

Update Cisco Systems (CSCO)

Nothing like confirming investors’ worries about the profitability of your company’s business strategy. Investors have been worried that in its pursuit of growth—a daunting task to begin with for a company that dominates its core markets and with a market cap of $104 billion—that Cisco Systems (CSCO) was trying to expand  in too many directions and that would eventually hurt profit margins. By its own count Cisco has moved into more than 30 new businesses.

Well, guess what. In the quarter that ended on January 29 (the second quarter of Cisco’s fiscal year), and that Cisco reported on February 10, the company posted a gross margin of 62.4% that was short of the 63.3% consensus among Wall Street analysts and the 64.5% gross margin in the same quarter a year ago.

Part of the lower margin story was completely explicable and shouldn’t raise any doubts among investors. In its core Ethernet switch business Cisco is rolling out new products and new products always start out with lower margins. The spending on new products here is a sign that Cisco is determined to defend this core market—good—but that it is facing strong new aggressively priced products from competitors such as Juniper Networks (JNPR) and Brocade (BRCD)—bad. But okay, this is the typical product cycle story in a technology market. Research and development costs climbed 19% percent in the quarter.

But part of the lower margin story suggests that Cisco’s basic growth strategy requires not fine-tuning but a complete overhaul. Read more

Update Cisco Systems (CSCO)

Can Cisco Systems (CSCO) stage a comeback?

At first (and probably second and third glances too) that seems a ludicrous question. We’re talking Cisco here. The gorilla so big that other gorillas make room in the bamboo.

But Cisco’s results for the first quarter of fiscal 2011, announced on November 10, have raised that question.

Here’s why—and why the question isn’t foolish.

Cisco reported solid growth for the quarter (19.2%) but a drop in gross margin to 62.8% from 65.3% in the first quarter of fiscal 2010 raised an eyebrow or two. Despite that, the company managed to report earnings of 37 cents a share for the quarter. That was 2 cents a share above analyst expectations.

And then the company raised more eyebrows. Read more

Got lots of cash? How about clubbing your competition with the green stuff? That’s what HP seems determined to do to Dell

On the surface, bidding $2 billion for a company that hasn’t made an operating profit in the last five years looks nuts.

Dig deeper, though, and the battle between Dell (DELL) and Hewlett Packard (HPQ) to buy data storage company 3Par (PAR) doesn’t look nuts. It’s looks insane. Sales are projected to hit all of $235 million for the year that ends in March 2011. Earnings before interest, taxes, depreciation, and amortization (EBITDA) are projected at just $21 million.

On August 28 Hewlett Packard bid $2 billion for 3Par, topping Dell’s previous bid, which topped Hewlett Packard’s previous bid, which topped Dell’s bid. Dell proposed paying $1.5 billion for 3Par. The latest bids come to roughly 95 times EBITDA for 3Par.

Aren’t these companies certifiable?

Well, if you’re even asking that question you don’t understand where we are in the economic cycle and how that’s driving company strategy in the technology sector.

This isn’t an age for valuation when companies carefully figure out how to get the best value for the cash they’re about to spend.

This is the era of Cash as Bludgeon. Cash rich companies are looking to club their poorer competitors over the head with dollars. At worst, the result of this spending will be a competitor unable to climb off the canvas for years. At best, this spending might be able to crush a competitor forever.

Put the Dell/Hewlett Packard contest over 3Par into competitive context and it starts to make sense, in spite of the insane valuation awarded to 3Par. Read more