The rise of

10th May 2012

He is said to have flown so high, so close to the sun, that his artificial wax wings melted and he plunged to his death in the Aegean Sea. The power of Icarus's wings gave rise to the abandon that so doomed him. The paradox, of course, is that his greatest asset led to his demise.

Could that same paradox apply to many of today's companies hitting the headlines? Their victories and their strengths so often seduce them into the excesses that cause their downfall.

Newbie Instagram was valued at a staggering $1 billion, but made up of just 13 people with precisely no revenue stream – coming from nowhere, it was suddenly worth a fortune. Facebook is another to spring to mind as we await its much-hyped IPO.

It seems the age of ‘fashion' stocks is well and truly upon us. As Tanel Lass comments on Mindful Money's feature on Warren Buffet's tendency to stick to old-favoured stalwarts: "Warren is right – there is too much "air" in the stocks of Facebook and Apple.

"…Longevity here doesn't mean history, but rather a product which is not so heavily affected by the turmoils of fashion trends…

"There is no doubt that Apple is a bubble that will burst within the next few years. Its current -10% decline in stock prices in the past couple of weeks is a testament that this is a highly volatile stock which has too much media hype amplifying sentiments, and is full of emotional rookie investors wanting a piece of the next gravy train as a result.

"Some say there is ample room for growth and 10 P/E ratio and growing income may suggest this, but people tend to forget that fashion comes and fashion goes. The amount of weight of APPL's stock and longetivity is its fashionability."

Turn back to January 2000. This marks the top of the Internet and technology bubble, when stocks were selling at P/E ratios of 400, or infinity if they didn't have any earnings, says Forbes.

The words ‘tech bubble' have been bandied about since the Apple share price really started to climb at the end of 2011. Could this be a stock built to burn?

There is a dangerous precedent for markets' believing that tech stocks can only go in one direction. Added to this, the only other company to have registered a $600 billion market cap was Microsoft at the height of the tech boom. Today Microsoft is worth considerably less. So does Apple need to watch out?

But does the market these days have a better nose for quality, revenue source and longevity than during the height of the dotcom bubble.?

The tech bubble was characterised by the huge valuations of companies people had barely heard of and which did not have viable business models.

But LinkedIn, for example, whose IPO last year saw its share price double on the first day, has a viable business model. Subscribers can pay to get a premium service, which is invaluable for head-hunters, human resource managers and others.

There's little doubt that technology of whatever form is the future, and the sector holds a certain fascination that a utility stock or a supermarket does not. But most of the popular stocks haven't yet the history to prove their longevity to investors, and it's a hard task trying to work out the winner of the future.

When thinking about the ever-shifting world of technology, predictions can be perilous, says Eric Jackson of Forbes; things never stay the same.

But what about Google? Surely that's a proven success. Eric says: "From one day to the next – as we live in our bubble of the familiar – things don't change much. I used Google today. I used it yesterday. Google's been around a long time and has made a lot of money. Therefore, it seems to be a reasonable assumption that Google will continue to play a central role in the way I access information from the web in the future."

However, he controversially adds that he thinks both Facebook and Google might disappear in the next 5-8 years because they lack new-generation know-how.

For investors, these businesses are not easy to understand compared to traditional models – they seem to make money easily but in a manner few of us understand.

So which are the tech businesses built to last, and which will burn? What do you think?

 

More on Mindful Money:

Mobile technology: What the west can learn from the rest

Can Yahoo learn from its mistakes?

Warren Buffett thinks Facebook and Apple are 'too risky'

To receive our free daily newsletter sign up here.

The Financialist

Leave a Reply

Your email address will not be published. Required fields are marked *