New technology has opened up opportunities for innovation in fields such as social media but there are questions as to how fledgling firms can be effectively valued by the market. The main problems are that future revenue is uncertain and nobody knows how to value companies such as Facebook, LinkedIn and Twitter.
The advantages these firms hold is that they have enormous user bases and are able to farm valuable personal data from these users. This is of high commercial interest to corporations and the advertising market but nobody fully understands how it could benefit investors.
The case was highlighted two weeks ago when Facebook listed an initial public offering. The initial opening price of $38 per share was achieved amid much hype and media coverage, making Facebook’s flotation of about $104bn (£66bn) the biggest in history for a technology firm.
There seemed to be a hangover for initial buyers of the stock after the IPO and the price tumbled. At the close of the Nasdaq last Friday, the share price was down by 16 per cent to $32.
This follows news that Morgan Stanley cautioned major institutional clients about revised revenue expectations for the firm before it listed, prompting a federal probe.
Retail investors seem to be the immediate losers of Facebook’s flotation, especially those who joined in on the IPO amid the day-one hype.
There is concern for the whole process and questions as to how such a company could possibly be valued so highly. Several commentators had forewarned of the dangers and some suggested the high valuations of new social media could cause a technology bubble.
Fund managers could be forgiven for mentioning the dotcom bubble of more than a decade ago.
Not all commentators are as pessimistic on technology firms. Close Asset Management portfolio manager and fund research specialist James Davies says investors need to be careful but not too careful. He says: “Some of the technology funds are enjoying fantastic performance but there is this huge risk-off approach because of what is happening in the eurozone.”
Fund managers who invest in technology say advances in technology and social media are changing the sector. Alliance Trust North American fund manager Matt Strachan, who is overweight in technology stocks, says: “Dramatic increases in data transmission speeds and remote storage have put the consumer in the vanguard of changes in the sector, as they now expect to be connected anywhere, any time – in other words, cloud computing.
“Social networks have been some of the most dramatic manifestations of the new order, with data stored remotely and accessible to all. The problem is they are still early in their evolution and valuing them is incredibly difficult.
“There is still tremendous growth in overall tech spend and not all tech valuations are a stretch. Apple, for example, is valued at less than 12 times this year’s consensus earnings.”
Data supplied by FE