Europe tech stocks ripe for rebound after Nasdaq-led rout

Fri Apr 25, 2014 11:04am EDT

* No tech bubble seen in Europe since fewer big web firms

* 180 U.S. stocks trade at more than 30x expected earnings

* Fund managers forced to dump sector globally

By Blaise Robinson

PARIS, April 25 (Reuters) - European technology stocks are ripe for a rebound as investors look for bargains following a sharp sell-off in pricey U.S. tech and internet firms that spilled over into Europe and Asia.

Fund managers are starting to look at European tech companies such as Germany's SAP and Sweden's Ericsson , which slipped alongside Wall Street peers despite much cheaper valuation levels.

Fears that sky-high valuations for Internet companies like Facebook and Netflix were overdone prompted a 10 percent fall between early March and mid-April in New York's tech-heavy Nasdaq Composite index.

While the correction on Nasdaq's so-called 'momentum stocks' might not be over, analysts see good buying opportunities in Europe, where the tech sector now trades at a cheaper valuation ratio than other major sectors. These include chemicals, construction and materials, industrials and travel and leisure.

"The Nasdaq was more than due for a correction. It traded at a price-to-earnings ratio of about 30. The S&P in comparison, trades at 17 times earnings, and I'm not even talking about Europe," said Arnaud Scarpaci, fund manager at Montaigne Capital in Paris.

"People quickly pulled the trigger and there was not much discrimination between very expensive names in the U.S. and fairly priced European techs."

Europe is home to fewer large listed technology companies than the United States and does not have major publicly traded consumer Internet companies in social media or online retail.

Its tech index includes names like fallen mobile phone maker Nokia, which recently closed the sale of its handset division to Microsoft, chip maker STMicroelectronics , and telecom gear maker Alcatel-Lucent.

VALUATION GAP

Even after the recent correction, nearly 180 stocks listed on the Nasdaq trade at more than 30 times expected earnings in 2015. In contrast, European tech stocks trade at an average price-to-earnings ratio (P/E) of 16.7 for expected profits in 2015, according to Thomson Reuters data.

Video: Why we're not in tech bubble 2.0 - Silicon Roundabout

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Chart: Europe's most expensive tech stocks

link.reuters.com/tus78v

Chart: Most expensive U.S. tech stocks

link.reuters.com/vus78v

Among the big U.S. momentum stocks, social media group Facebook trades at a 2015 P/E of 33, e-commerce giant Amazon at 80 and streaming video subscription service provider Netflix at 51.

The most expensive European tech stock is British chipmaker ARM, trading at 32 times 2015 earnings, while big names such as SAP, Ericsson and ASML trade at 15.4, 13.6 and 15.7 times their projected earnings for 2015.

The huge gap between U.S. and European tech stock prices is also visible in other valuation ratios such as price-to-book and price-to-sales measures.

While Facebook trades at a price-to-sales ratio of 19.8 and Twitter at 39.73, ASML trades at 5.2 times sales, SAP at 4.2 times and Alcatel-Lucent at 0.6 times.

The STOXX Europe 600 technology sector index has nevertheless tumbled 7 percent during the Nasdaq-led selloff, twice as much as the overall European market, and almost as much as the Nasdaq's 9.8 percent slide.

BUYING OPPORTUNITY

"A number of European tech stocks have been excessively hit in the sell-off, and this is now an opportunity for stock pickers to have a good look at each company's fundamentals and look for value on a stock-by-stock basis," said Jeanne Asseraf-Bitton, head of global cross-asset research at Lyxor Asset Management, which has $110 billion euros under management.

Wall Street's fall was accelerated by the record level of equity leverage used by hedge funds, with margin debt - equities bought with borrowed money - on the NYSE market totalling around $465 billion at the end of February.

The pull-back quickly morphed into a full-blown correction as investors faced with paying back the debt on top of taking a loss scrambled to sell positions on momentum stocks, with a ripple effect on tech stocks globally.

"The drop in European tech shares was mostly part of a knee-jerk reaction hitting all tech stocks around the world. In the 'risk-off' move, managers of global tech funds were faced with redemptions, and they had to sell names across the board regardless of valuation levels," said Roland Kaloyan, head of European equity strategy at Societe Generale.

"There had been no such thing as a bubble in the European tech sector, and there's just no big internet names in the region, which makes a big difference between the two markets. The U.S. and European tech sectors are very different by nature."

(Charts by Vikram Subhedar; Editing by Catherine Evans)

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