Those long enough in the tooth can recall the technology bubble at the end of the 1990s. You knew it was a bubble when the share price of France Telecom – about as dull a state telephone monopoly as you could possibly imagine – rose in value by 25% on 2 March, 2000, after a modest broker upgrade, adding more than €100bn to its then market capitalisation.
Is 'flotation mania' back?
You also knew it was a bubble when a deluge of start-up internet companies with existentially-challenged business models floated on valuations of several hundred times their prospective revenues, never mind profits, which did not exist. Profit was such an old economy word; trying to use outmoded valuation methodologies relying on earnings and dividends clearly showed an inability to ‘get’ the new paradigm.
More recently, this mania has returned. Flotations of technology companies in trendy sectors such as 3D printing, social media, mobile gaming and biotechnology shot to huge premiums and eye-watering valuations. For example, the float of Twitter in November 2013 saw a company with 230 million users and, according to Bloomberg, $647m of pre-tax losses, rise from an IPO price of $26 to a peak of $73.31 by the end of December. At that price Twitter was capitalised at more than $43bn, or 65 times 2013 sales.
Nasdaq following Twitter
A rash of such cases prompted claims that the market as a whole was priced for a fall. Certainly, there has been a sharp pull-back in many of the more extravagantly valued companies. Twitter itself has fallen by around 45% over the past three months, and the froth has come out of many other ‘hot’ sectors. The primarily technology-focused NASDAQ index has slipped by 5% from its high and is now down 4% year-to-date.
But at the same time as the technology sector frenzy has cooled some great, highly cash generative, profitable and growing businesses have seen strong performances.
Companies like Unilever, LVMH, BATS, Microsoft and Imperial Tobacco have all seen solid movements upwards. And we tend to like companies such as these, with traditional values like making money, backed by sensible valuations us oldies can understand.
All about valuations
In fact, many of the behemoths of the 1999-2000 technology bubble did end up being great investments – once they had fallen massively in the ensuing bust. Their business models were excellent; all that was wrong was the price at which the market valued them at the time.
However, we would rather invest in companies that produce steady, incremental gains to our clients, than in blazing comets that swoop too close to the sun and burn up. They are spectacular, but rather ephemeral, and often take a long time before they put on a show again.
