Technology stocks have had a phenomenal run in the past decade and have markedly outperformed the wider index.
The FTSE 350 Technology index has generated a 414 per cent return in the 10 years to September 1, compared with 119 per cent for the FTSE 100.
Alibaba’s initial public offering (IPO), where it listed its shares on the New York Stock Exchange, saw the company raise $21.8bn (£13.3bn) from investors. Its shares rose from the initial price of $68 to as high as $99, before falling back to $93.90 – a rise of 38 per cent in the day.
Subsequently, the company has become the biggest ever IPO after more shares were released as part of the flotation, bringing the total raised from investors to $25bn, according to reports in the Financial Times.
Alibaba’s $230bn market capitalisation makes it bigger than Facebook and Amazon.
But could this exuberant appetite for technology stocks now be a cause for concern and how much further can it go?
Guy Ellison, Investec Wealth & Investment’s head of equities, says: “The strong performance since 2004 is a function of the fact that the starting point was a period of extreme bearishness about technology stocks. Strong outperformance is not a surprise and has been driven by earnings, not speculation.”
Alistair Way, Standard Life Investments’ investment director for emerging markets, acknowledges the strong performance of emerging market technology stocks and internet stocks, in particular.
But in spite of global investors having grounds to be nervous after such a strong run and given the historic volatility of global internet stocks, he believes that share prices have been driven by fundamentals and that there is no evidence of a 1999-style bubble.
“Valuations, in general, do not look stretched, given the earnings growth being generated,” he suggests.
Mr Way points out that internet and smartphone penetration is rising sharply across emerging markets, generating great business opportunities for the best internet companies. He says that China, in particular, has seen a remarkable surge in ecommerce adoption, much more rapid than even in the UK, as consumers have embraced the product range, service quality and attractive pricing of platforms such as Alibaba’s, compared with traditional retailers.
But Didier Saint-Georges, Carmignac Gestion investment committee member, has mixed feelings about the technology sector. He says that in the past 15 years it has witnessed the worst excesses with ‘concept stocks’ valued at “absurd levels”, while recognising the most exciting growth trajectories that have taken place.
He now thinks that probably 10-15 per cent of technology stocks are grossly overvalued, but that “very exciting” and “underestimated growth stories” can still be found.
“For the coming years, one extremely powerful theme is likely to be how some companies will manage to monetise the growing dominance of mobile in internet usage,” he said.
Mr Saint-Georges cites Google and Facebook as having the opportunity to capture the lion’s share of the extraordinary potential represented by advertising revenues on mobiles.
He sees another great growth opportunity in ecommerce in China, where the size of this market has already overtaken its US counterpart. In spite of this, he says only half of Chinese internet users are online shoppers, compared with 80 per cent in the UK. This gives a sense of the potential for firms to surf the wave of growth in ecommerce.
“Alibaba is the obvious leader in this space, but there are also other smaller players,” he says. “Baidu is already generating very strong growth from search in China, and has made significant investments to build the necessary mobile ecosystem.”
Meanwhile, Richard Scrope, IWI Oriel Global fund manager, says that in order for technology companies to maintain their levels of growth, they need either a dynamic shift in the way people operate or to have a differentiating factor to their peers.
He says this has led to the recent acquisition of start-up companies to capture intellectual property rights, normally at a significant premium, which could raise concerns that there is another technology bubble in the making.
“However, unlike the dotcom boom, there are more companies today that are generating profits that are sustainable, as hardware and software are growing in tandem,” Mr Scrope explains. “With this, acceptance of the digital age is growing rapidly.”
He sees further opportunities in Africa, where millions have adopted mobile telephony payment systems, such as M-Pesa.
Mr Scrope cites a recent study by website Business Insider, which suggests the world is only at the initial stage of a boom in m-commerce and mobile in-store payments that will complement, not erode, the growth in desktop ecommerce transactions.
“This trend has been recognised by mobile hardware companies, which have enabled their products for near-field communication,” Mr Scrope says.
Technology, he says, is about to hit “a sweet spot of software, hardware and acceptance by consumers and retailers, converging all at once”.
But Mr Ellison sounds a word of caution, citing the total number of IPOs this year as a better barometer as to where we are in the market cycle.
With more than 100 new companies likely to have joined the main/AIM sections of the UK market this year, this will have been the best year for new issues since 2007. “On this measure, it is fairer to conclude that we may be nearing a market peak,” he says.
