For Tech Stocks, Bigger Prices Raise a Larger Question

A bull market is all about big numbers. And in this, the greatest stock bull market of all time, the numbers have become very, very big.

General Electric Co., for example, recently became the first U.S. company to top $300 billion in market value (that is, the company’s stock price times the number of its shares outstanding).

That means that investors collectively now believe that GE, by itself, is worth as much as half the entire U.S. stock market was worth in late 1974.

Everything is relative, of course. GE has grown as the U.S. economy has grown, and its shares have soared alongside many others over the last 24 years.

So even at $315 billion, GE’s market value is just 2.8% of the now $11.1-trillion value of the Wilshire 5,000 index, the broadest measure of U.S. stocks. That 2.8% figure may not be unreasonable for a giant, well-run conglomerate that Wall Street has long regarded as a microcosm of the global economy, making goods in 26 countries.

More likely to trouble veteran Wall Streeters are the big numbers attached to many technology stocks today, including some of the sector’s best-known names--like Dell Computer. With Dell’s stock at a record $117.56 a share on Nasdaq as of Friday, the market now values the personal computer maker at about $74 billion.

That number doesn’t look so huge next to, say, GE’s market capitalization. But it was only three years ago that the market thought Dell was worth a mere $3 billion.

Have things changed that much in three years? Certainly, Dell’s sales and earnings growth have been spectacular. Its direct-to-customer sales strategy means it builds to order, thus carrying little inventory.

Which also means there isn’t all that much to Dell, period, in terms of physical assets. The company’s shareholder equity--the excess of real assets over liabilities--was just $1.4 billion as of April 30.

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The $74-billion value that the market has ascribed to Dell, therefore, almost entirely reflects the idea of Dell and what investors trust is a blueprint for long-term success in the minds of Dell’s managers, rather than actual physical assets to which shareholders could lay claim.

Well, it’s a virtual world anymore, so what’s wrong with that? investors may well ask. On Friday, at Dell’s annual meeting in Austin, Texas, Chief Executive Michael Dell got a standing ovation from shareholders. Those who have been lucky enough to own the stock since 1994 have seen their investment mushroom 46-fold--which has helped ensure another big number, namely, the Nasdaq composite stock index’s breaching of the 2,000 mark last week.

As for Dell, “Our shareholders have been and will continue to be rewarded in the future,” a confident Michael Dell proclaimed.

Big numbers have a tendency to encourage executives to say things like that. Over the last two years it has been hard to find a more optimistic chief executive than Henry Silverman of Cendant Corp., as he spent billions of dollars--in stock value--buying up a boatload of rights to major franchise names such as Century 21 real estate, Super 8 Motels and Avis Rent-A-Car.

Cendant’s stock more than doubled between March 1997 and last spring, reaching a record $41.69.

But Cendant--and Wall Street--have since discovered that discount-shopping club operator CUC International, one of Silverman’s major acquisitions, turned out to be riddled with accounting fraud. Now, everybody’s suing everybody. And suddenly Cendant’s stock is no longer a big number, but a much smaller one--$15.50 a share as of Friday on the New York Stock Exchange.

Stock valuations are, of course, moving targets. Share prices that on Monday seem logical may appear highly irrational by Thursday. That’s the fun, excitement and (at times) severe pain of the market.

Right now, investors believe that globally recognized U.S. companies like GE, Dell, Microsoft, Coca-Cola, drug-industry leader Merck and a relative handful of others are rightly valued at levels that surely would have seemed preposterous just a few years ago.

Those five companies combined currently are valued at $1.06 trillion, or about 10% of the Wilshire 5,000 index.

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To put it another way, you could buy up half or more of the 5,300-some companies that trade on Nasdaq with the worth now affixed to those five firms.

Is that irrational? Investors who truly take a long-term view of things may argue that there’s nothing wrong with that equation. Given the critical mass that they have achieved in their industries--and barring some Cendant-style bomb--it’s a good bet that GE, Coca-Cola and Merck will still be around in 10 years. Of course, their level of sales and profitability going forward will still be subject to the marketplace’s vagaries, as usual.

By contrast, the majority of the thousands of smaller companies on Nasdaq don’t have the same likelihood of survivability over a 10-year time frame. Most may indeed survive--but few investors would affix to smaller companies the same seal of certainty that they’d assign to a GE or a Merck.

If there’s a fundamental underpinning to the big numbers that blue-chip stocks are sporting at this stage of the bull market, it’s the matter of certainty. On top of that, there is obviously a “momentum” game in progress--a pile-on by short-term traders who care not a whit about fundamentals but are happy to ride blue chips for as long as the train stays on the tracks.

What about the tech giants? Any business that is fast-growing tends to be fast-changing as well. As James Flanigan points out elsewhere in these pages, the Internet’s potential is vast, perhaps unmeasurable. Many tech companies are sure to be carried higher with the Net’s growth.

Even so, picking long-term survivors in the tech field has been, and remains, one of the toughest challenges on Wall Street.

Today, there’s a $74-billion bet that says Dell Computer is a survivor. Good luck, Mike.

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Tom Petruno can be reached by e-mail at tom.petruno@latimes.com