Nearly four years after technology shares went through the roof and then crashed to earth - destroying the savings of many investors -- there are distinct signs of life in the technology sector once more. Share prices of tech companies, which started rallying last year, have continued on an upward path this year and, with the renewed interest the sector is seeing, that looks set to continue, for the short term, at least.
Flotations of technology companies - something only a handful have managed over the past couple of years - are back on the menu. In a nutshell, the City's appetite for technology seems to have returned. For evidence of the revival in technology shares, look no further than the FTSE techMARK 100 index, which closed up another 4.93 points yesterday at 1,114.4, which is not far off double last year's level.
Worryingly, though, some believe that the comeback that the technology sector has already staged, and which is gathering momentum, might have run out of steam before the end of this year.
The respected City technology analyst Richard Holway admits the technology sector is experiencing something of a "mini bubble" but warns that a correction could be on the cards later this year.
"I would almost stake my reputation on the fact that we are in a mini bubble and we honestly do believe that although it will clearly go on for some period - one or two quarters - we believe a correction will occur later in the year," Mr Holway, a director of the IT research consultancy Ovum Holway, said.
While it sounds gloomy, many will, no doubt, sit up and listen. The last time Mr Holway came out with such a contrary view, he was pilloried for it even though it later proved accurate. In the summer of 2000, he predicted that shares in internet companies still had far further to fall even though prices had already plunged.
Issues such as the year 2000 computing problem, work done on the introduction of the euro and the emergence of internet businesses powered technology stocks to peak prices in the spring of the year 2000. So highly valued were these businesses that, at the peak of the market, companies such as the internet service provider Freeserve, the software company Baltimore, and the telecoms upstart Thus were all in the FTSE 100 index. But the bubble burst not long after with share prices falling and, as Mr Holway predicted, they continued to drop. In the sectoral shake-out that followed, many technology companies disappeared altogether.
He reckons that this latest "mini bubble" started at the beginning of the third quarter of last year "because people were starting to see earnings growth coming through although it was all because of cost savings".
Shares in the IT services company LogicaCMG are a prime example of the sector revival. Yesterday's closing price of 310.5p was about double where LogicaCMG stock was a year ago.
But Mr Holway has bad news. "Earnings expectations for 2005 just do not match with what we believe is happening ... and this will become very clear in the last half of this year, from Q3 onwards," he says, pointing to a second-half correction. He is not alone. Another analyst, who did not want to be named, said: "There is a definite danger of another boom in prices ... valuations are below the peak but tech relative to the market is back at a significant premium."
Their views will, no doubt, ruffle a few feathers among those in the City who are predicting better times. They will also, undoubtedly, add weight to the argument that technology companies wanting to float should do so quickly while the window is still open.
There were hardly any flotations on the stock market in 2001 and 2002 thanks to the rough conditions in the market generally, let alone the downturn in the technology sector. That changed last year, though, and this year, several technology companies are lining up market debuts. Among them are Civica, a software services provider for the public sector, and Business Serve, an internet company. There are plenty more, like the bluetooth company Cambridge Silicon Radio and the mobile technology business Symbian, waiting in the wings.
But then there is a raft of analysts who point out that while technology share prices have risen sharply over the past year, in many cases doubling, they have come from a very low level. Seamus Keating, LogicaCMG's finance director, noted: "I think the depression was overdone ...so the shares have come from a really low base."
The techMARK index, which was launched at a base level of 3,000 points in October of 1999 and which surged to a high of nearly double that in March of the year 2000, hit its low of about 600 points last March.
That means valuations are nowhere near what they were at the peak, although they have doubled in the past year. One technology analyst, who did not want to be named, said simply: "There's no bubble here." He pointed out that current earnings multiples for technology companies of about 20 times are far beneath the levels that were seen at the peak of the market when multiples shot up as high as 60-80 times.
In addition, others point out that if demand for all things IT really starts to pick up then earnings forecasts will need to be upgraded and that valuations will drop.
Milan Radia, a technology analyst at Bridgewell Securities, said: "We've had a couple of false dawns but now we are genuinely starting to see orders [for technology kit] starting to come through and bigger scale orders too. I feel we're on relatively firm ground to hypothesise that in the second half of this year, you will see interest genuinely start to translate into orders and that will be very healthy for the sector, so some of these ratings will come down as we see earnings upgrades."
There seems no shortage of subscribers to the more positive tone. Analysts at the IT research house Gartner are also predicting a better year. "We were the first to go negative on technology spending, and we remained pessimistic.... We now see true recovery in the making."
Analysts at Arbuthnot reckon 2004 will be much better for software and services companies. "For the first time in two years, IT managers are planning to invest in IT." The Close Brothers team reckon: "The IT spending freeze is seeing the first signs of a thaw ... next year should see the technology sector experience a period of consolidation and growth." Even Mr Holway is predicting growth this year - he just believes it will be low single digit.
For now, there is certainly a renewed level of interest in the sector but investors should remember that prices have already soared, albeit from a very low level. With the wreckage of the dot.com boom still too much of a recent nightmare for many, there will undoubtedly be more caution this time around and more differentiation.
That could well mean there is every chance Mr Holway and his supporters could be proven right again.Reuse content