How to stop tech bubble bursting in your client’s faces

How to stop tech bubble bursting in your client’s faces

Fergus Shaw, partner at Cerno Capital, has warned today’s overvaluations of technology companies is fast resembling the dotcom bubble that burst in March 2000.

For example, Mr Shaw said Snapchat’s share price reached $28.84 (£22.69) during its first week of trading and the value of its shares have since fluctuated below and above $20 (£15.74) making it a prime candidate to be a stock that blows the current tech stock bubble.

He said the share price for the instant messaging app soared high with the announcement of a new feature, while it plummeted when this new feature was quickly adopted by rival tech companies such as social media outlet Instagram.

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Swift on the heels of Snapchat, rival Instagram added a ‘story’ feature. 

Mr Shaw said: “The stock’s fluctuations since its celebrated initial public offering (IPO), forecast a long journey to gain the revenue to support its mega valuation.” 

It is anticipated that Alfa Financial Software, a UK firm which provides software for the likes of Barclays and Mercedes, will list the largest technology IPO since 2015 this year.

There is also talk of IPOs for digital media company Buzzfeed and telecommunications company O2. 

This IPO activity comes after social media outlet Twitter’s oversubscribed shares lost half their value since going public. 

Mr Shaw said: “The dotcom bubble teaches us that the industry is rarely aware of the extent of mania until it is too late, so investors must remain cautious of this trend. 

“The degree of influence the internet would project was underestimated back in 2000. We are now in a world of social media and instant communication, a concept we are still exploring. 

“Whilst companies like (online marketplace) Amazon have succeeded, many have not.”

Mr Shaw highlighted how in 2000, many people invested in technology as opposed to reliable businesses.

Yet when equity markets soared with technology investment, many were left with companies whose stocks lost up to 99 per cent of their value. 

He said during this period investors who stuck with companies seen as traditional or old-fashioned or investment in bonds and property, were doing just fine. 

However, Mr Shaw warned currently bond investors should be cautious, for despite their consistent returns during an extraordinarily long bull market, interest rate fluctuations in the US and UK may soon mark a change in this trend.

Mr Shaw recommended positioning in profitable businesses to take advantage of new technologies. 

He said: “The 2008 financial crisis, which saw equity, property and bonds crash together, emphasised the corrosive nature of debt. 

“This debt crisis alongside the tech mania, should remind equity investors to carefully assess how companies are financed and make sensible decisions. 

“This involves an ability to step aside when faced with hype, while looking to selective innovations that use proven technology.”

However Mr Shaw said investors could incorporate a handful of carefully selected companies, without allowing them to dominate the portfolio.