Technology stocks: Are they worth the gamble?

Calling time on tech stocks? A New York Stock Exchange trader last November at the flotation of Twitter

The term "tech bubble" trips lightly off the tongue nowadays.

Investors tend to slip it out when a technology stock has a bad day, Google numbers disappoint or the Nasdaq wobbles.

Most shake their heads despondently and recall the dotcom boom-bust of 2000-01.

How bad was that exactly? Well, one example will suffice - JDS Uniphase rose 2,231% in three years, and then fell the same amount in half the time.

We are not, it has to be said, anywhere near anything like that.

We are, though, in disappointing times for technology investors, and the reasons are not exactly clear.

The magic upon which Facebook, Twitter, LinkedIn et al successfully floated over the past four years seems to be dissipating.

Tech falls

Facebook is down 16% in the past month, LinkedIn is down 20%, Twitter down 27%. Google is estimated by Bloomberg to have fallen 11% since the end of February, taking into account its complex stock split earlier this month.

Technology companies coming to the market for the first time with initial public offerings (IPOs) are getting mixed receptions. King Digital, maker of the popular game Candy Crush Saga, was the biggest disaster, floating at $22.50, slipping 16% on the first day and now down at $17.61.

In the UK, shares in the online food chain Just Eat have fallen from its IPO price of 260p to 233p. Spanish online travel group eDreams Odigeo's share price tumbled 6% on listing but it has since managed to crawl its way back above its offer price.

And then there was Weibo.

Weibo wows Wall Street

Weibo chief executive Charles Chao (centre) celebrated the company's stock market debut on the Nasdaq exchange last week

Now Weibo, China's micro-blogging answer to Twitter, should have confirmed what everyone suspected, that technology stocks were yesterday's story. After all it hasn't even managed to make a profit yet.

Instead it got itself successfully floated on the Nasdaq on Thursday and gave investors a one-day 19% gain in return for their confidence.

What made this all the more remarkable was that the company is also up against the influence of the Chinese Communist Party, which in September ruled that anyone knowingly sharing false information online would face a prison sentence of up to three years. One research company said postings on Weibo fell a staggering 70% almost overnight.

Certainly Weibo was priced cheaply - but Rett Wallace, chief executive of Triton Research, says there's good evidence to support the optimism.

"One of the things to remember about Weibo is that it is really a joint venture between two very large Chinese conglomerates, Sina on one hand and Alibaba on the other. Investors in the American market have dealt in for a small piece of the financial ownership of that company.

"But the revenue base of this company is very healthy. It's only been generating revenues since 2012. We think it'll do more than $300m (£178m) in revenues this year and might even show a profit for the year."

Weibo is also a service company, something that makes it stand out from those tech stocks that run the risk of being one-trick ponies.

Reinvention

Chris Green, of the Davies Murphy Group consultancy, says there is a huge difference between service companies and pure software companies.

"The software companies are only as good as their last big hit and they can be sunk by a big failure. While a service company - a Facebook or a Google - can suck up a failure and get it right the next time."

Even with that distinction, it is hard to know what areas of the technology sector have the ability to continually reinvent themselves to keep up with the rapidly changing market. That is why investors are having doubts over the value of these stocks.

But it's not just the investors who are ranging around trying to find the next new big thing. Google has made eight acquisitions since January, including a company that makes drones, a home automation business and an artificial intelligence firm.

Facebook spent $19bn on messaging app WhatsApp and $2bn on virtual reality headset maker Oculus Rift.

Stuart Miles, of the technology website Pocket-Lint, says: "There is a feeling of a panic in all this buying - if we don't buy it someone else will, and the question is being asked, 'Is everyone paying too much?'

"We are at the end of a technology loop where everyone who is going to get one has a smartphone or a tablet, and everyone is scrabbling to see what the next thing will be - technology on your wrist, on your head, in the car, in your clothes. Everyone is gambling on all these different futures and the market has realised that's what it is - a gamble."

Visions of the future - at a cost: Facebook spent $2bn on Oculus Rift

Dazzling promises

But some of these gambles may just come off. "The mobile sector is continuing to thrive," says Chris Green. There is an ongoing shift from PCs to mobiles and tablets, and that will continue for a long while, with the industry delivering ever more portable devices.

"The automotive sector also has huge potential. It will grow massively with the development of integrated computer systems and the next generation of in-car entertainment, all linked together.

"But it is one of the most difficult areas for a user to interface with IT. The car is a very awkward environment but the two or three companies that crack it will make billions."

The fundamental problem with technology companies is that they make dazzling promises about the future. Unlike companies that make paper, pumps or pig-iron, that sell us the fabric of tomorrow's world, they sell us its dreams.

Investors have been only too happy to buy into those dreams, but from time to time they awaken, as they are doing now, to realise that not all of them will come true.