Both companies posted first quarter results this week which missed revenue targets, and both saw their share price fall.
Google attributed a decline in profitability to a spike in expenses due in part to its $3.2bn acquisition of home automation pioneer Nest. IBM, meanwhile blamed weak hardware sales for its lowest quarterly revenue in five years. There was an 11% slide in overall sales in emerging markets including China, Brazil, Russia and India.
The three largest internet stocks, Google, Facebook and Twitter, are also struggling with advertising on mobile devices, where growth is currently concentrated but where devices with smaller displays typically command lower advertising revenues.
Tim Gregory, head of global equities at Psigma, believes we could be heading for another tech bubble. He noted that in recent months there have been some stratospheric valuations placed in initial public offerings (IPOs).
“In addition there have been some eye-wateringly priced valuations for acquisitions, perhaps none more so than Facebook’s $19bn purchase of WhatsApp. When new technologies become ‘fashionable’ in the stock market, they become excruciatingly difficult to price.”
The big question for Gregory is whether poor results from the likes of Google and IBM combined with the recent pullback are just a “shimmy” for technology related stocks before they power higher again, or whether this is the start of a more substantial re-pricing of stocks in the sector.
“The mistake investors made in the last tech boom was not that they recognised the tremendous opportunity that was presenting itself in new industries, conversely it was the price that they were prepared to pay to own the participating stocks.”
Gregory highlights Cisco Systems as an example.
“The American multinational is arguably one of the great success stories that have grown through the ‘internet of everything’ as company chairman John Chambers calls it. In March 2000, Cisco was the biggest company in the world by stock market value with a market cap of over $500bn and a share price of over $80. Yet today, despite generating over $50bn of sales last year and being one of the clear winners from the Internet revolution, its shares sell for just $23.”
