What's Hurting Tech Stocks

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However, with fears of a recession growing, investors have reason to doubt such growth will be possible. Boyd and other analysts believe that is one reason why high growth companies such as Google, Amazon, and other Internet giants have seen significant selloffs.

The soft U.S. economy is leading analysts to scale back their expectations for certain sectors. As early as March, eMarketer reduced estimates for the U.S. online advertising market by nearly $2 billion, to $25.8 billion, citing the "foundering economy," (BusinessWeek.com, 3/18/08). Google and others say they have not yet seen advertisers cutting back, and have even speculated that marketers may spend more online given the increased measurability of the medium. But tech investors may be concerned as they see financial services companies come under severe pressure from the credit crunch, particularly mortgage lenders that had been heavy advertisers in the past.

Tech Spending Expected to Slow

Internet companies are not the only ones hit by cutbacks. In an interview with Reuters earlier this month, Cisco (CSCO) CEO John Chambers said he is seeing a slowdown in corporate spending among Cisco's clients and expects the trend to continue into 2009. His admission preceded a recent Bernstein Research poll of chief information officers who said that they expect tech spending will slow this year.

The reasons for selling don't have to be rational. The market, after all, is an ongoing battle between greed and fear. Some analysts believe investors are selling tech stocks now simply because they fear a recession could hit tech companies this year the same way that it did back in 2001, when technology shares traded at sky-high multiples. "There is a misperception that the tech land is overvalued," says Scott Kessler, an analyst with Standard & Poor's, which, like BusinessWeek, is also owned by McGraw-Hill (MHP).

He says that tech shares now trade at much more reasonable multiples and have more solid business models. Kessler has a strong buy on many large names including Microsoft, IBM, Hewlett-Packard, EMC (EMC), and a buy on Apple (AAPL). "The bottom line is that there are a lot of good values in tech," he says.

See BusinessWeek.com's slide show for a look at overvalued and undervalued technology stocks.

Holahan is a writer for BusinessWeek.com in New York.