After some of the most turbulent days in recent stock market history, many Sharetrack investors must be questioning the current attractions of investing in technology shares. But this volatility must be taken in the context of the sector's recent gains, leading to unrealistic expectations, a lack of investor discrimination between potential winners and losers, not to mention an overheated IPO market.
Although we are clearly experiencing a technological revolution, there is a notable distinction in the breed of companies participating in this new era. While powerful and profitable companies such as Oracle, Lucent and IBM are well positioned to participate in the development of the global technological infrastructure, there also exists a plethora of newcomers considered to be the innovators and powerhouses of the future, for example Baltimore and Amazon. Such companies are prized for their potential earnings many years from now but because many are currently loss-making, they cannot be measured by traditional valuation measures such as P/E multiples. Instead, many investors have turned to new tools such as price-to-sales, revenues-per-subscriber and so forth to value these companies. But as has happened in the past, valuation realities are being overlooked because of the hype and momentum surrounding such stocks.
The sector's growth characteristics are driving these valuations, in part due to the commercial emergence of the Internet as a business channel and its impact on traditional business models. Given the significant hope value factored into such share prices, many Sharetrack investors may want to abandon the technology trend. A less dramatic strategy may be to invest in product-oriented companies (such as Iona and Smart Force) that provide the enabling technology to many high-growth markets. These firms enjoy high profit margins, allowing them to grow earnings at a superior rate and conserve cash. This may emerge as a focus in the weeks ahead as a revaluation of the sustainability of business models takes on increasing significance in the pursuit of selecting the mega bytes from the bytes.
Laura De Voy works as a researcher in the private client department of Goodbody Stockbrokers
Goodbody acts as broker to Iona
ARM Holdings has had a five- for-one split in its shares effective, April 19th and Philips a four-for- one split, effective April 17th. All portfolios containing these stocks have been adjusted accordingly.
