Tech bubble is tethered by serious profits
As technology shares soar, it's easy to make comparisons with the 1990s dotcom boom
Sunday 31 July 2011
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.
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
Sales of the tablet are set to fall again, say analysts
Met Police confirm there was a 'minor disturbance' and that no-one was arrested
George Lucas criticises the major Hollywood film studios
Does Chris Grayling realise what a vague concept he is dealing with?
Trend which requires crisps, a fork and a strong stomach is sweeping Mexico's streets
Concerns raised phenomenon is threatening resort's image as a family destination
I Am Bread could actually be a challenging and nuanced title
Mark Dampier: Woodford’s young companies could be the stars of the future
Money Insider: Help to Buy must be boosted by building
Weekly Money: Round-up of the personal finance stories you may have missed 13-17 October
The opera singer, the broadband delay and why customers aren’t divas if they expect a good service
How to start your own internet business
- 1 Indian footballer Peter Biaksangzuala dies after injuring spine doing somersault celebration
- 3 Drink alcohol and eat meat to improve male fertility - but cut down on coffee, studies suggest
- 5 Lynda Bellingham dead: Loose Women presenter dies after battle with colon cancer
Cameron is warned 'no possibility' of UK reducing immigration and that bid to bring in quota on migrant workers would be illegal
Sorry Judy Finnigan – Ched Evans is no less sickening than an alleyway rapist
Residents should throw a street party and mix with immigrant neighbours, councils told
Workers 'could be forced to pay £5 a week' to get benefits
Russell Brand threatened with arrest after filming outside Fox News headquarters
London bus driver allegedly kicks gay couple off for kissing
iJobs Money & Business
£18 - 23k + Benefits: Guru Careers: We are seeking a Customer Service Executiv...
£60 - 65k + Benefits: Guru Careers: We are seeking a ASP.NET Web Developer / ....
£60,000 - £80,000: Saxton Leigh: Our client is an leading Asset Manager based...
£27000 - £32000 Per Annum: Clearwater People Solutions Ltd: Our large charity ...
Day In a Page
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village