Having a bubble?
With the UK's foremost tech stocks enduring a big decline in recent months, is there any danger of recreating the boom and bust of the turn of the century?
I do not know for certain whether prominent US economist Janet Yellen has a Facebook profile. But it is probably safe to say that the chairwoman of the US Federal Reserve Board (FRB) currently has few friends in the social media world.
Yellen's Monetary Policy Report published this month has certainly caused a stir among both investors and executives of internet firms. In it she argues that stock market valuations of firms in certain technology areas - including social media - have become worryingly high.
"Valuation metrics in some sectors do appear substantially stretched - particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year," she writes.
"Moreover, implied volatility for the overall S&P 500 index [of large companies drawn from various sectors], as calculated from option prices, has declined in recent months to low levels last recorded in the mid-1990s and mid-2000s, reflecting improved market sentiment and, perhaps, the influence of ‘reach for yield' behaviour by some investors."
As bombshells go, the financialese of the study does not, perhaps, make for the most explosive reading. But Yellen's words have ignited some fierce debate among both finance and technology professionals, with some praising her candour and pragmatism, and others damning her for commenting on the intricacies of an industry in which, they believe, she lacks proper expertise. And, all the while, everyone skirts cautiously around the dreaded ‘B' word: bubble.
But Marc Sharpe, founder of Marc Sharpe Ltd and board director at Alpha Real - both hedge fund specialists - is convinced the popping of a bubble could be on the way. He warns that if and when interest rates are raised by banking chiefs in the UK, US and Asia, there could be a marked "pull-back" from tech stocks.
"When people within high-powered organisations [such as the FRB] speak out, I guess there's a ripple effect where investors get a bit scared. It is substantially overstretched and I genuinely do believe there is a tech bubble," he said. "Tech stocks have taken a pounding over the past months, which is why we have not seen any IPOs of technology firms for a while."
Some of the London Stock Exchange's highest-profile tech and online firms have certainly endured a marked decline in the last year, including Outsourcery, Coms, Wandisco, MoPowered, and ASOS. Outsourcery has seen the biggest fall-off in percentage terms, with more than four fifths of its stock valuation eroding within a year.
On 29 July 2013 the firm was trading at ￡1.25 a share, but by 13 June this year it had plummeted to just 24.5p.
Internet fashion retailer ASOS has endured the biggest drop in monetary value this year, nosediving from a high of ￡70.50 per share on 26 February to ￡27.40 on 27 June.
Justin Speake, chief executive of Bloor Research, opined that "ultimately, the UK market is always a reflection of - and is significantly affected by - the US market". But he denied that there is any danger that a bubble of the scale of the early noughties could be created, explaining that the cloud providers attracting investment in this day and age are fundamentally different from the glut of e-tailers rushing online around the turn of the century.
"The huge difference is that there is an absolute transformation in the business model [this time] and that it is based on something which, to some extent, is proven," he says.
"Some of these people will make a lot of money."
Jay Kasandra, search marketing manager at online phone seller Mobiles.co.uk, agrees that we need not necessarily read too much into recent declines, and that a number of players - including some from this country - could ultimately survive the recent ups and downs and prosper in the long term.
"In the context of the past few years, the recent decline is still only a blip to reaching the peak of the boom. It's not surprising if you take into consideration the profit levels of tech companies working in the social bubble against their stock value," he says.
"Take into account the recent acquisitions of WhatsApp for $19bn (￡11.1bn) and the rejected $3bn dollar offer from Facebook for Snapchat. These are low-revenue or loss-making companies which are highly valued due to what they can offer in the future. We'll see UK companies such as [Moshi Monsters creator] Mind Candy, which create sustainable profit-making businesses, as the ones who come through the recent dip."