While it is a certainty in economics that there will always be periods of irrational exuberance, we believe there is no approaching tech bubble and the market needs to calm its jitters.
Looking at the markets we see a picture of growth. The S&P 500 is regularly hitting new highs, driven in part by the technology sector. As for the Nasdaq, it has only just hit its highest level since 2000. But that does not equate to a tech bubble. In fact, the market trends simply do not add up to that.
We cannot ignore the fact that in the last year alone the US saw almost the same level of tech IPOs as in 2000, the year of the crash. But the basic market fundamentals are different.
Price-to-earnings ratios – that is, how expensive the sector is compared to its forecast earnings – indicate that the tech market is trading at multiples of 14, which is in fact well below the 15-year average of 22.3. If anything, the tech sector is undervalued if one uses this metric alone.
Close analysis of this point appears to bear it out: all the major technology companies are trading with modest price-to-earnings valuations: Microsoft 15, IBM 13, Oracle 17. Only Google at 30 and Facebook at 81 appear to be bucking that trend.
There is no doubt that some companies may be overvalued, but the likes of Facebook are starting to show significant profits even though it has yet to take advantage of its unique information and user base with any new services.
Looking back at the dot com bubble at the turn of the century, most tech stock on the Nasdaq had a price-to-earnings ratio of more than 100 – and that was the average.
The Nasdaq is still a full 15 per cent below the level it hit in 2000 and if we take a closer look at the average tech IPO, prices are rising only about 40 per cent from offer prices.
During the bubble just prior to the dot com crash, internet IPOs averaged an 88 per cent stock price rise on the first day of trading.
Yes, there have been some startling IPOs in the sector – all you have to do is think of Twitter – but look at the bigger picture. King Digital actually fell on its début in New York.
Furthermore, the entire tech IPO market has shrunk. Looking back at the bubble, more than 300 technology companies went public, all rising on average 50 to 70 per cent on day one alone.
2014 has only seen roughly 24 major IPOs so far and the average daily gain has shrunk to 30 per cent.
One other vital point also needs to be made when comparing 2000 with 2014: there is a lot of investment capital out there looking for a home in the next big thing, so huge investments are getting a lot of coverage.
But it is mostly being made in proven market successes such as Dropbox or Cloudera.
Furthermore, those big players with deep pockets are acquiring. But again there is a major caveat: they are doing so only when there are proven returns and the best recent example is the Softlayer acquisition by IBM.
So perhaps rather than talking up the fear of a new technology bubble, industry commentators and financial analysts need to look into the facts, compare like for like and stop the FUD.
We have some way to go before we can even begin to call this a bubble.
Justin Speake is chief executive at Bloor Research
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