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Should investors buy the tablet hype?

The tech industry is producing some shiny new toys, but the sector looks overheated

Jeremy Glaser 27 January, 2010 | 1:27PM
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The tech industry thrives on hype. From the heyday of Pets.com in the dot-com bubble era to the touting of 3-D TV at the Consumer Electronics Show this year. The last few weeks have featured the almost deafening hype for Apple's tablet computer, which is widely expected to be announced at a press conference later today.

It shouldn't be too surprising that this Apple product is creating so much buzz. First off, Apple's rabid, loyal fanbase combined with the firm's legendary secrecy tends to boost the interest level on anything going on in Cupertino. Second, if the rumours are to be believed, a big component of the tablet device will be electronic versions of books, newspapers, and magazines. Apple is hoping that the novelty of the device will convince users to pay for content (through iTunes, naturally) they are currently getting for free over the Internet. This could be a boon to the publishing industry. As such, news editors and reporters are particularly keen on keeping track of developments surrounding the tablet.

So should investors buy the hype? For the most part, the answer is no. Apple has a track record of delivering on overhyped products (see iPhone). But anyone who read the firm's earnings release earlier this week already knows this. Much of the potential upside of any new device is likely already priced into the stock. Shares are currently trading very close to our fair value estimate, and although our Apple analyst Toan Tran believes that the tablet could very well provide some upside, it isn't likely to be a game changer in the way the iPhone was.

So if Apple shares don't look like a screaming bargain, maybe there are opportunities elsewhere in the tech space? Perhaps all the excitement around the new Apple device is indicative of a climate where consumers will be eager to buy all sorts of electronic goodies, boosting the prospects of the entire sector. Alas, even if this is the case, the market is generally overvaluing this potential growth. Taking a look at our market valuation graph, which rolls up the fair value estimates to arrive at a sectorwide price/fair value ratio, shows that tech is no bargain. The hardware and software sectors are each currently more than 10% overvalued.

So instead of the tablet uncovering great investing opportunities, it may be another example of the value investing maxim: Avoid what's popular. Our analysts are certainly factoring in a return of consumer and enterprise IT spending, but it looks like the market is just a little bit carried away.

To see which stocks look the most overhyped, we used Morningstar.com's Premium Stock Screener to find one-star stocks in the Hardware or Software sector. Results can be seen in this table.

Jeremy Glaser is Markets Editor for Morningstar.com.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Jeremy Glaser  is markets editor for Morningstar.com, the sister site of Morningstar.co.uk.

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