Saturday 29 June 1996
From across the Atlantic come some refreshing signs that Wall Street is at last starting to recover its senses, with a cooling of the speculative mania in technology stocks that has been worrying experienced investors for months. For most of last year, the market was engaged in a passionate love affair with high technology stocks, driving any company which could find a way to link itself with the magic word "hi-tech", or better still "Internet", to quite ridiculous price levels.
Netscape, the company which pioneered the software for the most popular "Internet browser", was the one which attracted most of the limelight last year. Within months of being floated on the market, this tiny company, less than two years old, had more than tripled in value and commanded a market capitalisation of more than $2bn - sufficient, if it were a UK company, to put it in the FT-SE 100 index of leading shares.
But Netscape - which at least has a serious product and is now engaged in a fierce battle with Microsoft for dominance in the potentially highly valuable market for companies' internal networked communications - was only the tip of the iceberg. Scores of other companies with similar sounding, but far less important, products also came rushing to the market, lured by the chance to raise new capital on the back of investors' latest passion. Last year was a record one for new issues on Wall Street, with companies raising a total of $32bn, and while most of this was in the form of conventional issues, start-up technology companies were well to the fore.
If some of the froth is now being wiped off the market, it is not before time. The point about such waves of speculative frenzy is not that the companies involved are necessarily bogus - though you can be sure that a good number of the technology companies launched in the past year will rapidly prove to have rather less exciting prospects than their supporters have been claiming. The Internet is a growth area, and some companies - including possibly Netscape - will do very well out of it, just as Microsoft has grown from nowhere to become one of the biggest corporations in the whole of America in little over a decade. The winners and losers will be settled on the basis of which companies have the better products and the better staying power in a fast changing industry.
You can in fact argue that the flood of new issues demonstrates that the stock market is actually fulfilling admirably its purpose of channelling money into growth areas. Few opponents of stock market capitalism highlight the fact that the market, far from being too short term and anti-technology, may be doing its job of supporting new enterprises too well at times such as these. But it is clear that the industry as a whole cannot support all the valuations that the market is putting on companies in the hi-tech field. Economics simply does not allow it. The valuations on that basis are unsustainable. It is good fun for those who have the skill to jump on a bandwagon and get off before the bubble bursts, as it now seems to be doing.
But, alas, for every winner, there has to be a loser too. The good news for those who are more interested in longer-term investment opportunities is that once the bubble does burst, there may be some real bargains to be had. Some of these companies will be long- as well as short-term winners, and the time to start picking them may soon be with us. It is worth noting, too, that shares in Intel, the largest maker of chips for PCs, are still trading near their highs while those of many small chip makers has slumped as competition intensifies and the market is swamped. Economics will always out in the end.
Once launched, the shares of many of these companies have shot up. Companies such as America Online, the leading on-line information provider for PC users, Yahoo!, a smaller version of Netscape, and US Robotics, which makes modems, have all gone through the roof. At their peak, these companies were trading at multiples of earnings which ran into the hundreds, compared with a normal p/e range for most companies of 10-15 times. Some companies, including Netscape, have yet to report any earnings at all.
This explosion of hi-tech issues has created some strange market anomalies. Perhaps the best example is that of a company called Presstek, which makes computerised offset colour printing systems. This is not a new issue, but a company floated on the stock market in 1989. Since then, helped by a narrow market and some skilful promotion, its shares have risen nearly 100-fold. At its peak a few weeks ago it was valued at just over $3.1bn, which is more than half the value of the world's largest printing company, R&R Donnelley. Donnelley's sales are 230 times as large as Presstek's, yet it is valued by the stock market at less than twice the price. This is about as good an example of "concept" investing at its peak as you can hope to find. The price being placed on some of these companies has begun to lose all touch with reality. Such sudden bursts of new offerings in a single thematic area are a classic signal of a market which has become dangerously speculative.
But now, at least, reality seems to be breaking in again. Many of the high-fliers are suffering. In the last few weeks, shares in Netscape have fallen 40 per cent below its price at the peak of the investor rush for technology shares. America Online is down 44 per cent, and Presstek, which appears to have been particularly heavily promoted, is down by over 70 per cent. Serious analysts in Wall Street have begun to draw parallels between the latest wave of new issue mania and the last similar boom, which fizzled out in 1983.
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