Active investment commentary & analysis

Has the technology bubble returned?

Has the technology bubble returned? The dotcom excesses of 2000 have now been followed by huge IPOs of loss-making businesses such as Uber and Lyft. These may soon be joined by more UK tech flotations. Investors question whether the whole sector - including ecommerce and fintech - is flawed; businesses that are rapidly growing, but money pits.

This should be an area where active management can shine; using fundamental analysis rather than the simple momentum-driven approach of passives. Indices capture the most popular companies, leading passives to buy more of what has already grown in market capitalisation. It looks like a recipe for herding, and detaching prices from true value. Understanding the value of technology, and managing risk, means stepping away from the headlines.

Network effects - where a winner takes all in providing a platform or service - do not happen in every sector. But some small and mid-cap businesses are quietly moving to dominate specialist areas, building genuine market power and margin strength. In contrast, the characteristic of some of the major listed businesses is that multiple competitors are still slugging it out in a sector, with more money to lose before a winner emerges. Many sectors such as taxi apps, robo-advisers or mobile-based current accounts, are still at a high risk stage. Profitability, and even good standards of governance, seem very far away. But there are mid-cap businesses with critical and unique technology supporting bigger companies. Value is to be found in B2B companies in sectors such as vehicle safety testing, robotics, cloud services and cyber security.

The scramble for some recent tech IPOs is a reminder that technology should fit within the constraints of fundamental analysis. Technology merits space in portfolios, but only based on predictable earning power.