Early last year, the situation could not have looked much rosier for technology investors. Global economic conditions were perfect. Optimism abounded and prices continued to soar. By the end of February 2000, the 25 best performers in the Nasdaq were trading at price-to-earnings multiples of more than 100 times anticipated earnings.
In such a momentumdriven market, normal valuation methods appeared outmoded. Investors would seek out “concepts” and “visions” rather than products.
Fund managers became ever more creative to justify their stock positions, with a proliferation of unusual ratios such as price-to-possibilities and market-capitalisation-to-market-opportunity ratios – necessary given that many companies were some way from showing a profit.
Generally speaking, the environment was such that technology fund managers were desperate to buy stocks and hold on to them for as long as possible.
So where are we now? Things have turned full circle. Investors appear to believe it is too late to sell and yet, at the same time, they seem to be too scared to buy.
But while technology stocks are unlikely to do much more than trade sideways for the rest of the year, this is probably as bad as it gets. The flow of truly grim corporate figures – such as Cisco's mid-April profits warning – are now almost behind us and we have gone from being totally miserable to just gloomy.
While we are unlikely to see a significant improvement in fundamentals in the short term, shares should improve.
But the mood of pessimism is pervasive and some are beginning to question the fundamental reasons for investing in technology in the first place. Some now talk gloomily about the “death” of the personal computer, by which they mean the market is now saturated. Personal computer stocks went completely out of favour in the past few months, being seen as “dull growth” rather than “super growth” stocks.
Such a belief is based on a misinterpretation of the product. PCs should be viewed as just one of the means of accessing the internet. Rather than concentrating on PC penetration per household, the investor should focus on the number of internet access devices per person – handhelds, mobile phones and so on.
This will lead to a whole new demand cycle for technology. There is still an unsatisfied demand for untethered access to email and other corporate or personal data. This is destined to be the driver for technology demand in the months to come.
Pessimism is also rife in relation to the internet sector but again this demonstrates the narrowness of some investors' vision. The internet is more than just a bunch of failed dotcoms and is also about more than how much money advertisers are spending online. Among the wreckage there are some great businesses which will emerge to be successful leaders in their market segments.
To an extent, the downbeat attitude is understandable. Many investors were caught out by investing in optimistic IPOs and can perhaps be forgiven for their scepticism.
But perhaps the pendulum has swung too far. Last year, proponents of the internet were describing it as one of the biggest-ever leaps in communications technology and this is still the case.
There will be huge changes to existing communications networks as well as computing networks to accommodate all the new applications that the internet will bring. Of course, this requires spending on technology and at the end of that spend is a technology stock that will benefit. The spending is still there but it is simply more rational than last year, given that budgets are being more heavily scrutinised than before.
Instead of an environment where investors were happy to invest in concepts, they now have to be far more aware of the commercial realities. They want to own technology companies that have a true value-added offering, a technology advantage or a market leadership position.
In the new environment, real fundamental analysis and selective stock-picking will count for much more than they have done in the past. Now that the IPO window has been closed, low-quality companies have less opportunity to raise cash to waste.
Dare we hope, too, that the tailing-off of IPOs will result in a better allocation of fund manager resource? Those managers who seemed to spend all their time during the technology boom fighting to get their slice of the next hot deal might now spare some time to analyse real companies' fundamentals.