Wall Street gets the jitters as another dot.com bubble begins to inflate

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The Independent Online

With 14 million iPods flying off the shelves in the run up to Christmas, the view on high streets around the world is clearly that the music player's maker, Apple Computer, is one of the hottest brands of modern times.

Google, Yahoo! and eBay have gained similar standing in the internet world. Reflecting their position as a familiar part of life for millions of people, shares in these companies have surged ahead, with analysts basing their valuations on many multiples of earnings they have yet actually to make.

But this week the shine has slightly come off these highly fashionable companies. A mixture of disappointing results and warnings about slower earnings in the coming months have prompted some on Wall Street to wonder whether these supposed wonder stocks have soared to unsustainable levels.

Reflecting the nerves about the valuations of these companies, Apple's shares fell more than 3 per cent on Wednesday evening. Apple reported its best ever quarterly results, including a 65 per cent leap in revenues in the three months to 31 December compared with last year. But investors took fright because the company has taken pains to stress that it anticipated a pause in demand for its computers while it moves over to using chips made by Intel to power them.

Heady as Apple's valuation is - its shares trade at about 38 times estimates of future earnings - the maker of ultra-chic electronics looks somewhat undervalued compared with the major internet companies.

Shares in Google, the most talked-about member of the sector, trade at 48 times their expected earnings.

The multiple could rise still higher as several analysts have again raised the price they think Google's shares will reach to $600 (currently Google trades at $449, having floated in August 2004 at $84).

Google is not alone in having a sky-high valuation. Yahoo!, Google's closest rival in terms of its business model, trades on multiple of 52, and the online auction house eBay trades at 43 times. When both Yahoo! and eBay faltered this week - with a mixture of disappointing results and subdued future forecasts - their shares also fell.

eBay warned its 2006 revenues would be up to $5.9bn, which is below Wall Street's forecasts and prompted investors to worry that the company is facing higher-than-expected competition.

Meanwhile, Yahoo!'s shares slumped as much as 12 per cent on quarterly results which disappointed the market. In both cases, analysts are wondering whether the companies are turning into mature, slower growth businesses more quickly than anticipated.

Google, which does not give guidance to the market, unveils its own results on 31 January.

Jitters about America's largest technology companies might have been exaggerated by the alarm running through Japan's stock market this week caused by the widening scandal surrounding the internet start-up company Livedoor.

But some are also wondering whether technology stocks, having taken a beating when the hi-tech bubble burst in 2000, are again dangerously inflated.

The hype surrounding some technology companies distorts the fact that the wider picture about the sector is rather muted.

Shares in American technology companies have risen more in the first few weeks of this year than they did in 2004 and 2005 combined (the sector rose 6.3 per cent from 1 January until last Friday, compared with 1.8 per cent in 2004 and 1 per cent in 2005).

The Nasdaq, the US index where most technology stocks are listed, passed the 5,000 mark in March 2000 - the height of the dot,com boom - is now at less than half of that level.

But within that humdrum performance, some companies have enjoyed soaraway growth which some financial analysts are warning no longer rationally reflects their underlying business performance.

Scott Kessler, the director of technology analysis at Standard & Poor's, said: "The fundamentals of these companies are very strong but whether or not they warrant the valuations they are currently trading at is open to question."

Mr Kessler, who has a sell recommendation on Google's shares, believes investors are "basing their valuations on the state of affairs right now rather than what might happen in the future".

At the moment, Google enjoys massive advantages over rivals due to its unquestioned dominance in the world of internet search, but a significant number of observers - and the company itself - expect the next few months to be tough.

The S&P's analyst points to risks linked to its move into unfamiliar areas - such as its agreement potentially to pay more than $1bn (£570m) to buy a radio advertising business this week - as it tries to diversify its business away from internet search.

At the same time, Google is facing increasing competition in its core market from rivals who, in some cases, provide superior services in fields such as video search.

Finally Google must combat problems such as "click fraud", whereby individuals repeatedly click on to certain online adverts in order to make it appear that they have been seen by more consumers than is really the case.

It is not just Google that is having to take considerable risks to try to keep its dominant position in the rapidly developing world of the internet. eBay recently raised eyebrows by suddenly moving into the internet telephone business with its decision to snap up Skype in a deal worth up to $4.2bn.

While not in the same sector as the internet's hottest companies, Apple's enviable position in its market is based upon a similar explosion of growth in consumers using its products.

As shown by the sudden dip in Apple's shares when it forecast, on Wednesday, more gradual sales for the next few months, if the company's growth slows for a prolonged period, its shares could well take a sustained nose dive.

Mr Kessler said that does not mean technology companies are set to fall off a precipice, due to the opportunities this sector offers investors.

"People are focusing on where to find the growth opportunities. They say 'I can't get the kind of growth or margins or profitability anywhere else in the market," he said.

But perhaps for those companies that have been most in vogue, it might be a welcome relief to be removed from the spotlight, at least for a while.

Apple to open more UK stores as it grows from its core

Apple is expected to target a number of new store openings in the UK this year as part of its plans to open a further 40 of its sleek, white shops around the world during its current financial year.

Its second London outlet is set to open within weeks in the capital's northern shopping hub of Brent Cross, giving the iconic computer maker six stores across the UK.

The group is keen to capitalise on the runaway success of its iPod portable music players, which were among the top Christmas gifts. It sold 100 iPods every minute around the world during the pre-Christmas quarter.

Despite a concerted push from rivals, Apple is expected to have further increased its lead in the MP3 player market over the last quarter of 2005, building on its 40 per cent share in the three months to the end of September, according to Understanding & Solutions, a technology consultancy.

The California-based group opened 11 stores worldwide from October to December, the first quarter of its financial year, giving it 135 outlets around the globe. It is poised to open its first shop in continental Europe, in Rome.

Apple maintained its customary cloak of secrecy yesterday about its plans for Britain, despite pressure from analysts for it to detail its plans amid fears that its second-quarter earnings would undershoot Wall Street estimates.

The computer group does not pre-announce its new store openings, preferring to keep consumers guessing until the last minute. News of its Brent Cross store dribbled out only when it started advertising for new jobs at the outlet. Since opening its flagship store in Regent Street in 2004, the group has positioned itself in the UK's busiest shopping centres.

Its four other outlets are in Bluewater, Kent; the Bull Ring, Birmingham; Meadow Hall, Sheffield; and Trafford Centre, Manchester.

Susie Mesure

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