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Tech 2.0 has a solid business basis

Rachael Adams reports that the technology sector is hotting up again and this time is on sound foundations

There are two words guaranteed to strike fear into the hearts of investors – technology bubble. Following the dotcom boom and bust of the late 1990s, technology investing has never entirely rid itself of the taint.

But with Goldman Sachs recently valuing Facebook at £33bn and Twitter reportedly in takeover discussions that value the business at an estimated £6.2bn, is the tech bubble reinflating?

In addition, corporate networking website LinkedIn is thinking about becoming publicly listed and discount voucher service Groupon is also considering an IPO that could reach £9bn.

As these businesses are all currently privately owned, getting exact figures about their earnings and profitability is difficult.

Current estimates put Facebook’s 2010 earnings at around £1.25bn while Twitter’s earnings are predicted to double to £68m in 2011 – some way short of the valuations the businesses are being given.

Some of the valuations may be based on an expectation or hope of a repeat of the rapid growth in earnings seen by other tech stocks such as Apple or Google.
When Google was valued at $50bn in 2004, its earnings were only $3.2bn but by 2010 Google’s earnings were $23bn.

Despite the recent hype, Axa Framlington global technology fund manager Jeremy Gleeson dismisses talk of a bubble.

He says: “I really don’t think it is a second bubble. A bubble is where valuations rise dramatically throughout an entire sector.”

Gleeson believes that because Facebook and its peers are privately owned, we will not see a broader market impact. He says: “Public and private investments are very different. Private companies dictate their own share prices while public companies get their valu-ations from supply and demand in the market but that is not to say that social media is not a growth area.”

Bestinvest senior investment adviser Adrian Lowcock agrees that the rise of a few tech stocks is no sign of a bubble. “In the first bubble, you got an attractive valuation irrespective of quality just because you were an internet provider. This time, we have proof of potential growth.”

Potential is the key this time round. Although Facebook’s advertising revenue stands at just $2m, this figure will increase. Lowcock says: “For the younger generation who use it all the time, companies can use social media to access that market.”

Another difference is tangibility. Bubble 1.0 was built on blue-sky ideas, but Informed Choice managing director Martin Bamford believes that the long-term value of one sub-sector of technology makes 2011 different from 2000.

Bamford says: “Anything based on traditional business models is not susceptible to a bubble. The smartphone may have a trend element to it but it is a real growth sector where there is a palpable product with retail profit to be made.”

Apple is the prime example of this. Its shares have tripled over the past three years, driven by growing profits from the launch of the iPhone and recently the iPad.

Although Gleeson sees Apple as another isolated extreme, he does predict more investment in everyday technology by consumers as we continue to see a change in consumer attitude towards technology.

“There is an increased consumer appetite for it. Smartphones, tablets, flatscreens, even cars contain more electronic devices now. This has made investors look at technology differently and realise we are in a different place than 10 years ago.”

Global economic recovery is another reason for the growth in value of tech- nology equities.

He says: “Burgeoning economic recovery last year meant that equities as a whole performed well. If you look at the MSCI World IT index, technology expanded by 14 per cent. You have got to see the increase in terms of a larger economic recovery.”

If the high profile of a few market-leading companies is driving the interest in the technology sector, behind the scenes, technology companies and their investors have been quietly getting on with business.

Over the past five years, the Investment Management Association technology and telecoms sector has returned an average of 43.9 per cent. Over one and three years, the figures are 31.2 per cent and 53.6 per cent respectively. This compares with the average for the UK all companies sector of 20 per cent, 16.3 per cent and 22 per cent over one, three and five years.

Lowcock says it is not just consumers who are driving growth in the technology sector. “It is part of the bigger economic cycle. Companies stop investing during a recession. As they come out, they start capital expenditure again and they are going to want to spend in areas where they can increase profit – and that is in technology.”

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. I check http://grouponbot.com more often then I check groupon now.

  2. Groupon is really doing the job……I am amazed to see groupon to being so successful and actually i am also a user of groupon i passes over http://grouponbot.com on the net some 2 years ago when this service was launched and from that time i was thinking that someday this site will gain the reputation of facebook and simmilar sites. It offers cool, i mean awesome national deals and discounts ….Now it is grouping up with other companies like Virgin airlines and Starbucks etc.

  3. There seems to be two opinions, one is the next dotcom boom is like a ponzi scheme, whereas others believe it has a strong foundation as this time a company has some form of revenue, and if in doubt can sell advertising in some form.

    Jeremy Gleeson is correct I think when he clarifies what he thinks is a bubble, I believe IF there is a bubble its only in socially enabled startups, but not in others sectors.

    Socially enabled startups are hard to quantify, I have surveyed 107 startups to understand the current startup market, and has some surprising results.

  4. Facebook’s REVENUES, not earnings, were about USD 1.5bn last year. These are incredibly stretched valuations, even by the standards of what I was seeing as an analyst in the last dot com boom.

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