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Cramer uses tech's top 10 stocks to argue the sector is not overvalued

Technology stocks have been fairly consistent out-performers in the stock market, so much so that Jim Cramer wanted to counter growing worries that the tech sector is overvalued.

“It seems like every hedge fund manager who still cares about individual stocks believes that tech is too expensive. It doesn’t matter what these companies do, or how overwhelmingly profitable some of them are,” the “Mad Money” host said.

Investors and money managers have also developed concerns that tech’s current situation resembles the run-up to the dotcom bubble burst of 2000.

To seek out the counterweights to this argument, Cramer zoomed in on the 10 best performing tech stocks in the S&P 500 for the first half of 2017.

Watch the full segment here:

Up 59 and 34 percent for the year, respectively, Activision Blizzard and top competitor Electronic Arts are at the heart of the entertainment world’s expansion into digital video games, Cramer said.

Along with fellow game maker Take Two Interactive, these gaming giants are riding several major trends: an expanding base of tens of millions of players around the world, improving semiconductor chip technology that makes for better games, and the rise of eSports.

“In 2000, most of the tech leaders were about to experience a sudden drop-off in sales. I’d argue that the exact opposite is true for these major video game companies, all of which seem like they’re on the verge of an earnings breakout of epic proportions,” Cramer said.

Cloud-based software creator and Cramer-fave Adobe has rallied 37 percent in 2017, and the “Mad Money” host thinks its multiple-revenue-stream strategy looks quite promising.

Not only has Adobe’s software-as-a-service model delivered a large boost to the company’s gross margins, but its foray into artificial intelligence could make for another untapped growth category, Cramer said.

“Adobe’s price-to-earnings multiple of 34 may seem reminiscent of the dotcom era, at least until you do the homework, at which point you realize that valuations would’ve made it one of the cheapest tech stocks around in 1999 or 2000,” he added.

With a 36 percent gain for the first half of 2017, open-source software player Red Hat has been able to seize on the beginnings of various industries’ migration to the cloud.

“The company just had a big uptick in earnings because their platform allows for an instant shift from cloud to cloud,” Cramer said. “Red Hat, like Adobe and the gaming stocks, is simply misunderstood by a marketplace that still has trouble getting its head around the massive savings from the cloud versus old-fashioned, on-premises software or hardware.”

Possibly the most confounding stock on the list, multi-faceted software company Autodesk has seen a 36 percent rally so far in 2017.

The company is entirely enterprise and wholly non-promotional, two things that have served it well in its not-very-crowded space, Cramer said.

“It allows companies to translate ideas from engineers’ imaginations to the computer screen to the real world. The company has this incredibly fast-growing market all to itself — their biggest competition happens to be from the pirated versions of their own software,” the “Mad Money” host said. “I see the same pattern here that’s helped power Adobe’s stock: it’s switching to the cloud in a space with no meaningful competition. To me, that makes Autodesk’s valuation — the stock trades at at 39 times earnings — feel a little more palatable.”

Up 38 percent for 2017, semiconductor maker Micron delivered a stunningly positive upside surprise with its earnings just last week, but Cramer has one problem with the report.

“Unlike the other tech winners, Micron is well understood. There’s no mystery here. Despite a remarkable earnings beat, Micron’s stock actually had the audacity to decline 5 percent on the news,” he said.

The reason is that some of Micron’s products, namely DRAMs and flash memory chips, are viewed as commodities, and investors are concerned about potential competition in the space.

“Don’t let the irony be lost on you,” Cramer said. “Micron is the company that’s widely considered to be the most similar to the winners of the dotcom era in the prospects, [and] also has the stock with one of the lowest price-to-earnings multiples in the entire market.”

With possible estimate cuts on the horizon for Micron, the “Mad Money” host recommended looking to other tech names for better additions to your portfolio.

Also up 38 percent for the year, digital payment processing giant PayPal has been subject to bearish analyst calls lately that have painted the company as unable to compete with the likes of Visa, JPMorgan, and even Amazon.

“Yet instead of being outright enemies, they’ve become more like frenemies over the last few years,” Cramer said. “PayPal is generally seen as the ultimate winner in this space because it’s so beloved by — a word everyone’s really tiring of — millennials. It’s the fastest grower in the industry and the company hasn’t even had the time to begin to monetize its Venmo cash transfer system that teenagers can’t get enough of.”

And as PayPal continues to seize on its share of the demise of brick-and-mortar retail, Cramer thinks the plateauing stock has serious long term upside.

After a hyper-extension that pushed its stock to $160 before falling back down to $143, chipmaker Nvidia has seen a 35 percent gain for the first half of 2017.

“My fear now, after this pullback, is more about missing the next leg up than being obliterated by the next leg down because Nvidia’s chips are at the center of the hottest trends in tech, from artificial intelligence to gaming to Bitcoin,” Cramer said.

Because Nvidia has its hands in so many red-hot areas of tech, Cramer thinks that, unlike the highly overvalued stocks of the dotcom era, Nvidia could have far more room to run and is worth buying into its next leg of weakness.

The stock of Lam Research has rallied 34 percent so far in 2017, but investors worry that its business with commodity chip makers like Micron could mean doom for the semiconductor equipment maker.

“I think these fears are unfounded,” the “Mad Money” host said. “In fact, I believe Lam has a pretty clear runway to be a strong performer in 2018 given how its best-of-breed machines are experiencing incredible demand.”

That said, Cramer would recommend investors buy Lam Research into any weakness, even after its healthy run on Wednesday.

Cramer’s view of Broadcom is relatively straightforward. While many market watchers may see the company as being held hostage to Apple’s successes, the “Mad Money” host could see Broadcom become the leader in pushing global adoption of 5G wireless networks.

“Thanks to a series of brilliant acquisitions, CEO Hock Tan has put together a fabulous company that’s become integral to mobile, not just Apple,” Cramer said. “Although, as I’ve told ActionAlertsPlus.com club members, it’s not a bad stock to own in the run-up to the new iPhone launch.”

All in all, the tech layout in 2017 looks quite different than it did in 2000, with a mix of lower-multiple out-performers and higher-multiple companies with steady earnings forecasts.

“Do not dismiss the strength in tech as merely a second incarnation of the dotcom bubble,” Cramer said. “The moves in these stocks have genuine underpinnings in the strength of the underlying companies, which is why I think most of these tech winners will keep on winning long term and the decline we recently saw? Opportunity, not 2000-year redux or the ghost of large tech declines past.”

Disclosure: Cramer’s charitable trust owns shares of Adobe and Broadcom.

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Cramer uses tech's top 10 stocks to argue the sector is not overvalued

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