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Face value

Last week’s news that Facebook will list on the US stockmarket has again raised questions about the valuations of the latest generation of technology companies but, away from the headlines, many tech funds have been quietly generating decent returns.

The Facebook flotation follows that of LinkedIn and Groupon last year, valuing the companies at $11.6bn and $12.8bn respectively.

The Facebook IPO intends to raise $5bn but only a fraction of the company’s shares will be sold off. Depending on the initial listing price, some predictions have said the float could see the business valued at up to $100bn.

As is usually the case with technology listings, the share price valuations are factoring in future earnings’ growth.

Facebook’s latest figures show revenues have grown quickly in recent years, up from $777m in 2009 to $3.7bn in 2011, with profits of around $1bn last year. However, if Facebook achieves a valuation of $100bn, this would see the company valued at 27 times earnings.

Co-manager of the Henderson global technology and horizon global technology funds Ian Warmerdam says: “This is generating a lot of excitement but it remains impossible for us to form an investment opinion. This is not because we do not believe in the strength of the social media trend or in Facebook’s competitive position.

“The spectacular hype surrounding the extraordinary proliferation of Facebook makes for exciting headlines but it is only when the more prosaic aspects of profit and loss and balance-sheet analysis can be properly considered in relation to market value that any genuine investment decision can be made and we have only vague details of these at best.

“As exciting a growth prospect as Facebook presents, we are therefore wary. The level of hype surrounding social media in general, and Facebook in particular, is so high that an attractive entry point from a valuation point of view may not be achievable.”

The difficulty in arriving at a sensible valuation for tech companies is demonstrated by the very different experience of investors in Groupon and LinkedIn.

Groupon shares debuted at $26.11 on November 4 last year but fell to $21.69 by February 2, 2012. LinkedIn has fared much better so far, with its shares up by more than 60 per cent since its IPO last May.

The Share Centre investment research manager Sheridan Admans says it is hard to get the launch price right. He says: “As of December 30, 2011, 59 per cent of all US IPOs that launched in 2011 had suffered a decline in share price. With the high level of volatility in the markets, it is difficult to anticipate what the future holds for the newly floated companies.

“It is important to look at the reasons for floating and the company’s future plans for growth.

“It is beneficial to the investor to wait until the stock has been in the public focus for some time and to monitor share price activity, as hype tends to detract from valuation. It is often too early to make a judgement on the initial activity of a stock and there are normally other plays within the sectors with a proven track record.

“However, some investors may look to LinkedIn for a comparison of a recently floated social network. LinkedIn floated at $45 per share in May 2011 and the price was $72.37 per share at close of market yesterday – an increase of more than 60 per cent.”

The difficulty in valuing individual companies means investors might be better served by concentrating on the advantages of the technology sector rather than focusing on one or two high-profile companies.

Although many investors are still scarred by the memory of the technology crash in 2000/01, in which many tech funds saw as much as two-thirds of their value wiped out, the few remaining funds have been producing decent returns over a more recent timescale.

According to figures from FE Trustnet, the technology and telecoms sector is the third best performing IMA sector over three years, returning an average of 82.5 per cent, and the fifth best performing sector of five years, returning an average of 50.1 per cent.

Returns over one year have seen a sharp drop, with the sector average a return of -1 per cent but the market is back in positive territory over three and six months.

Chelsea Financial Services managing director Darius McDermott says the sector has changed dramatically since the days of the technology bubble. It is now dominated by global companies such as Apple, Google and Microsoft, with long-term track records and strong balance sheets.

McDermott says: “Technology has become a different type of investment play than it was back in the bubble. It was full of speculative companies that were not making money, had no revenues, no cashflow and were burning cash. Now, if you look at the likes of Apple, it has got about $50bn of assets on its balance sheet.”

Although McDermott says some investors may still be wary of the sector, it now stands up to investment scrutiny beyond the hype of a few companies and offers the potential for solid long-term returns, with the possible addition of getting in at the start of the best-of breed start-ups.

“The majority of the big companies have big balance sheets but there is always going to be the opportunity to invest in start-ups. I think, as a single sector, investment, technology does stand up on its merits and it is still cheap on its own history.”


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