Optimistic investors return to tech stocks

It is now ten years since the dotcom bubble burst and today the technology sector landscape is completely different to that of a decade ago. At the end of the 1990s and beginning of the 2000s, companies were floating based on an idea rather than profit or even sales.

Many investors got caught up in the hype and then, unfortunately, got caught up in the bubble bursting. Ten years down the line, the technology sector is far removed from those heady days. There are still start-up companies looking to float but these days investors are far more savvy and demanding in what they are looking for.

However, not everyone was a casualty and research from Fidelity International shows that some technology companies that survived the crash have managed to make money for shareholders; SanDisk, the flash memory maker, and Amazon.com have both fared very well.

For most tech survivors, share prices in 1999 were generally much higher than now because prices were greatly inflated by the frenzy at the time. The fact that the sector is no longer expensive – indeed, in many cases valuations are at multi-year lows – is helping to boost the appeal of technology stocks once again but for the right commercial reasons.

For many fund managers, technology is currently one of their most favoured themes and this is despite the vastly reduced number of dedicated technology funds in recent years – a result of investors remaining wary of the sector since the 1990s.
Technology companies have experienced an unusually profound recovery with earnings now above their mid-2008 peak, having risen more than 79 per cent from this time last year, according to Threadneedle Investments. It believes the relatively low levels of debt and high cash balances built up by technology companies after the dotcom bubble burst will serve them well in a slow recovery.

With a number of new tech product cycles ahead, either just starting or likely to start, this may mean that some companies could see very good top-line growth combined with very good earnings growth.

Technology companies are now taking a more grown-up view of forecasts. Gone are the unrealistic revenue growth predictions, replaced by a bottom-line focus on profits and cash flows.

A lot of technology company executives have been through the dotcom boom and bust and are being disciplined in the current downturn. Balance sheets across the sector are generally in very good shape and valuations are still quite attractive relative to the long-term history of the sector and to the market. But despite the positive outlook, investing in technology is not for the faint-hearted and is a high-risk strategy.

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