You are here: Home - Investing - Experienced Investor - News -

Tech Bubble 2.0: Fact or fiction?

Written by:
When the Nasdaq dropped 3.1% overnight, whispers intensified that a second tech bubble was set to burst. But should private investors be spooked?
Tech Bubble 2.0: Fact or fiction?

Eye-wateringly expensive acquisitions and a recent wave of billion-dollar initial public offerings (IPOs) have fuelled speculation of a repeat of the technology bubble of the late 1990s, in which hundreds of “dot-com” companies saw their share prices plummet.

When the US tech-focused stock market – the Nasdaq – suffered its worst single-day percentage loss since late 2011 on 11 April, falling 3.1 per cent, talk of the bubble bursting intensified.

But should UK investors who hold technology stocks in their portfolio be spooked by the recent sell-off?

According to Tom Stevenson, investment director at Fidelity, this is not a bubble, but rather a “necessary correction”.

“If you look at the chart of the Nasdaq over the last few years, it has started to look like the 1990s. Valuations in some case have gotten pretty frothy – now we’re seeing a shake-out,” he says.

Nick Evans, who manages the Polar Capital Global Technology fund, agrees that what we are seeing is not a repeat of the ’90s dotcom bubble.

He explains: “Our view is that the pullback is constructive. It has washed out some of the fast money that’s chased these stocks higher.”

Both men agree the sell-off should be a time for investors to review the type of tech company they hold.

Stevenson recommends investors try to differentiate between companies showing sustainable growth and those that may be overvalued.

He says: “In some pockets of the market valuations are still very high. If you look at some of the recent IPOs, they have been extremely punchy. Some are reminiscent of valuations we saw at the last peak of the market and are factoring in an extraordinary amount of growth which may or may not eventualise.

“That narrow bit which is overpriced looks vulnerable to further falls.”

However, he says older, more traditional stocks are not highly valued at all.
He also adds that there is a fundamental difference between the early 1990s and now, which is that a lot of companies are now genuinely profitable businesses.

“Facebook, for example, is producing real and sustainable profits.”

But Evans says the low valuations of these companies can be misleading.

He says incumbents in technology tend to be well-managed businesses built around old technology but as new developments come onto the market, they have to respond by cannibalising their own business.

He explains: “You have to be careful- these big incumbents aren’t as cheap as they appear.”

Where new technologies like cloud computing once sat happily alongside older systems, Evans believes that legacy technologies, already set to suffer from falling IT budgets and slowing growth rates in emerging markets, will soon find themselves supplanted.

This presents a challenging landscape for individual investors. As innovation and the rate of disruption increases, it will become more difficult to stay abreast of the market and select winning stocks.

He advises: “The key is being selective and focusing on those companies that will be the true winners. Focus on quality, barriers to entry and ultimate profitability.”

Stevenson and Evans agree that diversification is key.

Stevenson says: “Especially in technologies, there will be winners and losers. It’s like venture capital in that respect-the winners will be fantastic investments and make up for quite a few failures. This is a time to be discerning.”

Polar Capital Global Technology fund: Top 10 Holdings

Rank  Company 
Google Inc 
Facebook Inc 
VMware Inc 
TripAdvisor Inc 
Western Digital Corp 
Intel Corp 
Microsoft Corp 
Tencent Holdings Ltd 
Visa Inc 
10  Mastercard Inc

 Source: Trustnet, as of 28 February 2014.

Related Posts

Tag Box

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Your right to a refund if travel is affected by train strikes

There have been a wave of train strikes in the past six months, and for anyone travelling today Friday 3 Febru...

Could you save money with a social broadband tariff?

Two-thirds of low-income households are unaware they could be saving on broadband, according to Uswitch.

How to help others and donate to food banks this winter

This winter is expected to be the most challenging yet for the food bank network as soaring costs push more pe...

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

DIY investors: 10 common mistakes to avoid

For those without the help and experience of an adviser, here are 10 common DIY investor mistakes to avoid.

Mortgage down-valuations: Tips to avoid pulling out of a house sale

Down-valuations are on the rise. So, what does it mean for home buyers, and what can you do?

Five tips for surviving a bear market mauling

The S&P 500 has slipped into bear market territory and for UK investors, the FTSE 250 is also on the edge. Her...

Money Tips of the Week