Tech bubble is tethered by serious profits

As technology shares soar, it's easy to make comparisons with the 1990s dotcom boom

Once bitten twice shy is probably an apt saying for many investors looking at technology shares.

At the end of the last century, all the investment talk was of a new type of firm, the dotcom. Investors were told by many so-called experts to forget about such business basics as turnover or even profit and to focus on these pioneers of the "new" economy. Yet it crumbled to dust, leaving investors nursing heavy losses.

But now, more than a decade later, tech is booming again, led by social media websites such as Facebook, Twitter and LinkedIn which are phenomenally popular with users. But should memories of the dotcom crash serve as a warning for investors?

Fears of a repeat performance seem to be having little effect on investor appetite, according to Barclays Stockbrokers, with the majority of its clients naming Apple and Google as their top two technology stocks in a recent poll.

"A decade on and it seems that technology is making a bit of a comeback," says Patrick Connolly of independent financial adviser AWD Chase de Vere. "It is the best performing investment sector over the past three years, returning an average of 63 per cent. This compares favourably with China which has produced 49 per cent, UK shares at 25 per cent, UK corporate bonds at 22 per cent and property at just 4 per cent,"

LinkedIn, a networking site for business professionals, was the first of its kind to go public in May; its shares doubled on the first day of trading on the US Stock Exchange. By day two, the company was valued at $9bn. Impending IPOs for game developer Zynga, Twitter and discount site Groupon are also causing a stir and could pave the way for the one everyone has been waiting for: social media giant Facebook, which has an estimated $100bn price tag.

Many are concerned that such high valuations are a sign that another technology bubble is forming, but experts say there are some key differences. In terms of sheer statistics, Jemma Jackson, from the Association of Investment Companies, highlights the contrast. She says: "At the end February 2000, the average tech investment company was on a premium of +3.41 per cent according to Morningstar (ie it was so popular that the market was prepared to pay more than the value of the underlying assets). At the end of June 2011, the average investment trust in this sector was on a discount of -8.7%, and this is pretty much in line with the broader industry average -8.8 per cent."

Moreover, the internet is infinitely different in terms of the sheer numbers that companies can reach, with 750 million Facebook users worldwide and more than 100 million users on LinkedIn. Unlike many of the internet companies that floated on the stock market in the 1990s with little more than an idea, many of today's big internet companies are already well established. Yet where investors must still be very careful is in determining how these companies can turn numbers into serious profit for investors.

"While there are large profitable technology companies, there are also those going to market that aren't yet making money. Web-based music services site Pandora Media, group-buying site Groupon and Chinese social networking site Renren have all filed to go public, but none as yet is generating a profit," says Mr Connolly.

Investors must also remember that internet users are a very fickle bunch; this is especially dangerous for the free sites that demand little or no customer loyalty. Abandoned by the bulk of its users, MySpace was recently sold for $35m (£22m), a fraction of the $580m Rupert Murdoch's News Corporation paid for it back in 2005.

There is also a danger that the hype surrounding a handful of leading web companies could persuade investors to punt on riskier firms with less potential to make money. Only those who manage to back the right horse can look forward to a healthy return, while others could be lumbered with their money tied up in companies worth only a fraction of their original price in a few years' time.

"Technology is an exciting and important sector in all types of investment portfolios," says Stephen Barber, who advises Selftrade on markets and economics. "But I think we need make the distinction between 'incubator' type tech businesses and those companies which lead the sector. After all, technology is a growth sector of global reach, profiting from domestic demand and the emerging economies."

Concerns over the profitability of social media stocks shouldn't necessarily steer investors away from the technology sector altogether. One of the most straightforward ways to get exposure to technology growth is through a fund holding a wide range of global technology stocks such as GLG Technology, Polar Capital, Axa Framlington Global Technology and Henderson Global Technology. Investors can be somewhat appeased that managers tend to bid for established and profitable companies such as Microsoft, Apple, Google, IBM, Samsung and Hewlett-Packard.

"A diversified technology fund is a worthy component of a portfolio. If you look at funds like GLG Technology, the two largest holdings are Apple and ARM, which manufactures components for it," says Danny Cox from IFA Hargreaves Lansdown. "A fund like this is the best way for most people to invest in technology."

Specific technology funds are still a specialist, higher risk area, so experts say that exposure should generally be kept to a maximum of 5 per cent. Those wary of investing in a single sector may prefer to stick to more broad-based equity funds and look for discerning fund managers. At Axa Framlington Select Opportunities, manager Nigel Thomas has 8.85 per cent of his £2.7bn fund in technology, which includes a large holding in Imagination Technologies.

Index trackers can also add diversification to a portfolio and are less risky than buying individual company shares. Legal & General offers an index tracking fund following a basket of 100 global technology shares, although it does charge a 1 per cent annual fee which may seem pricey for a passive investment vehicle. Investors may also feel more secure with a fund manager who can adapt to the rapid changes in the fortunes of tech companies.

"As none of us can accurately predict the future, obtaining your UK and overseas equity exposure, including small cap and value funds, using index funds gives a decent spread of equity holdings, including tech stocks. It also ensures that returns aren't eaten up by costs," says Jason Witcombe from IFA Evolve Planning.

Expert View

Danny Cox, Hargreaves Lansdown

'The technology sector has been in the spotlight, particularly Facebook and Twitter. Some investors are worried about frothy valuations, but taking a broader approach and looking at the technology sector as a whole, one sees a much more varied picture.

'The problem with the last tech boom was the numbers of companies with exaggerated valuations. You know when you are in a bubble when people in the pub tell you about tech funds they've bought. We are nowhere near that stage.'

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

News
The Banksy image in Folkestone before it was vandalised
people
Life and Style
tech

Sales of the tablet are set to fall again, say analysts

Sport
football West Brom vs Man Utd match report: Blind grabs point, but away form a problem for Van Gaal
News
i100
PROMOTED VIDEO
Arts and Entertainment
Bloom Time: Mira Sorvino
tvMira Sorvino on leaving movie roles for 'The Intruders'
News
Brian Harvey turned up at Downing Street today demanding to speak to the Prime Minister
news

Met Police confirm there was a 'minor disturbance' and that no-one was arrested

Arts and Entertainment
George Lucas poses with a group of Star Wars-inspired Disney characters at Disney's Hollywood Studios in 2010
films

George Lucas criticises the major Hollywood film studios

Voices
Chris Grayling, Justice Secretary: 'There are pressures which we are facing but there is not a crisis'
voices

Does Chris Grayling realise what a vague concept he is dealing with?

Life and Style
A street vendor in Mexico City sells Dorilocos, which are topped with carrot, jimaca, cucumber, peanuts, pork rinds, spices and hot sauce
food + drink

Trend which requires crisps, a fork and a strong stomach is sweeping Mexico's streets

News
Blackpool is expected to become one of the first places to introduce the Government’s controversial new Public Space Protection Orders (PSPOs)
news

Concerns raised phenomenon is threatening resort's image as a family destination

Life and Style
Northern soul mecca the Wigan Casino
fashionGone are the punks, casuals, new romantics, ravers, skaters, crusties. Now all kids look the same
Life and Style
gaming

I Am Bread could actually be a challenging and nuanced title

Life and Style
The charity Sands reports that 11 babies are stillborn everyday in the UK
lifeEleven babies are stillborn every day in the UK, yet no one speaks about this silent tragedy
News
Nigel Farage has backed DJ Mike Read's new Ukip song
i100
Voices
The number of children in relative income poverty is currently 2.3 million in the UK
voices

Environment
A Brazilian wandering spider
natureIt's worth knowing for next time one appears in your bananas
Life and Style
Time and Oak have developed a product that allows drinkers to customise the flavour and improve the quality of cheaper whiskey
food + drink

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Customer Service Executive / Inbound Customer Service Agent

    £18 - 23k + Benefits: Guru Careers: We are seeking a Customer Service Executiv...

    ASP.NET Web Developer / .NET Developer

    £60 - 65k + Benefits: Guru Careers: We are seeking a ASP.NET Web Developer / ....

    Operational Risk Manager - Asset Management

    £60,000 - £80,000: Saxton Leigh: Our client is an leading Asset Manager based...

    Project Coordinator - 12 month contract

    £27000 - £32000 Per Annum: Clearwater People Solutions Ltd: Our large charity ...

    Day In a Page

    Oscar Pistorius sentencing: The athlete's wealth and notoriety have provoked a long overdue debate on South African prisons

    'They poured water on, then electrified me...'

    If Oscar Pistorius is sent to jail, his experience will not be that of other inmates
    James Wharton: The former Guard now fighting discrimination against gay soldiers

    The former Guard now fighting discrimination against gay soldiers

    Life after the Army has brought new battles for the LGBT activist James Wharton
    Ebola in the US: Panic over the virus threatens to infect President Obama's midterms

    Panic over Ebola threatens to infect the midterms

    Just one person has died, yet November's elections may be affected by what Republicans call 'Obama's Katrina', says Rupert Cornwell
    Premier League coaches join the RSC to swap the tricks of their trades

    Darling, you were fabulous! But offside...

    Premier League coaches are joining the RSC to learn acting skills, and in turn they will teach its actors to play football. Nick Clark finds out why
    How to dress with authority: Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear

    How to dress with authority

    Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear
    New book on Joy Division's Ian Curtis sheds new light on the life of the late singer

    New book on Ian Curtis sheds fresh light on the life of the late singer

    'Joy Division were making art... Ian was for real' says author Jon Savage
    Sean Harris: A rare interview with British acting's secret weapon

    Sean Harris: A rare interview with British acting's secret weapon

    The Bafta-winner talks Hollywood, being branded a psycho, and how Barbra Streisand is his true inspiration
    Tim Minchin, interview: The musician, comedian and world's favourite ginger is on scorching form

    Tim Minchin interview

    For a no-holds-barred comedian who is scathing about woolly thinking and oppressive religiosity, he is surprisingly gentle in person
    Boris Johnson's boozing won't win the puritan vote

    Boris's boozing won't win the puritan vote

    Many of us Brits still disapprove of conspicuous consumption – it's the way we were raised, says DJ Taylor
    Ash frontman Tim Wheeler reveals how he came to terms with his father's dementia

    Tim Wheeler: Alzheimer's, memories and my dad

    Wheeler's dad suffered from Alzheimer's for three years. When he died, there was only one way the Ash frontman knew how to respond: with a heartfelt solo album
    Hugh Bonneville & Peter James: 'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'

    How We Met: Hugh Bonneville & Peter James

    'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'
    Bill Granger recipes: Our chef's heavenly crab dishes don't need hours of preparation

    Bill Granger's heavenly crab recipes

    Scared off by the strain of shelling a crab? Let a fishmonger do the hard work so you can focus on getting the flavours right
    Radamel Falcao: How faith and love drive the Colombian to glory

    Radamel Falcao: How faith and love drive the Colombian to glory

    After a remarkable conversion from reckless defender to prolific striker, Monaco's ace says he wants to make his loan deal at Old Trafford permanent
    Terry Venables: Premier League managers must not be allowed to dictate who plays and who does not play for England

    Terry Venables column

    Premier League managers must not be allowed to dictate who plays and who does not play for England
    The Inside Word: Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past

    Michael Calvin's Inside Word

    Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past