Why we are not witnessing a tech boom
The words ‘tech bubble’ have been bandied about since the Apple share price really started to climb at the end of 2011. Earlier this month, its market capitalisation hit $600 billion dollars, only the second company to see its market cap get that high. So it appears like everyone wants a bite out of the proverbial apple.
There is a dangerous precedent for marketsâ€™ believing that tech stocks can only go in one direction. The dotcom bubble back in 2000 caused havoc in the equity markets and also contributed to the Federal Reserve keeping interest rates incredibly low, one of the contributing factors to the housing crisis in 2007.
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 about a third of that value. So does Apple need to watch out?
We have seen the Apple share price fall quite sharply in recent days, it is down 7 percent since last week. However, it has followed the overall market lower and thus the decline may not be people getting nervous about holding Apple stock, but rather some profit-taking and a normal correction. While we certainly donâ€™t expect Apple to continue to appreciate at the pace it has of late, good profit growth, surging sales and plenty of opportunity to expand its retail operation across the developed and developing world could help prop up the share price even at these levels.
Itâ€™s not just Appleâ€™s incredible marketing and product quality that makes us doubt the doomsayers. In my view, the overall market does not look like it is in bubble territory. Although Apple is bigger than some small European countries (it is more than double the size of Portugalâ€™s annual GDP), it is not the only tech stock on the block. Research In Motion (RIM), who makes the Blackberry, has seen its share price fall 77 percent over the past year. Nokia has seen its share price dwindle from $9 per share in April 2011 to below $4 today. So not every company has seen its share price surge nearly 90 percent, like Apple has. Hence the Nasdaq remains more than 30 percent below the peak reached in 2000 before the dotcom house of cards collapsed.
The key difference between then and now is that the market has a better nose for quality, revenue source and longevity. Hence why Apple â€“ with its 50 percent control of the tablet market and dominance in the phone sector â€“ has managed to outperform RIM and Nokia. The tech bubble was characterised by the huge valuations of companies people had barely heard of and who, ultimately, did not have viable business models. LinkedIn, whose IPO last year saw its share price double on its first day trading, has seen its share price trajectory get more volatile since then rather than surge to frothy levels. Also, LinkedIn has a viable business model. Subscribers can pay to get a premium service, which is invaluable for head-hunters, human resource managers and others. LinkedIn is a good example of the free/ subscriber hybrid model that some newspaper companies should have followed years ago.
Facebookâ€™s IPO later this year is likely to attract a lot of attention, but it may not meet expectations. Although Facebook is a fascinating story (youâ€™ll know what I mean if you have seen The Social Network) Iâ€™m not totally convinced with its business model and believe that users may dwindle off as even the hard core Facebookers get bored of the minutia of their â€śfriendsâ€™â€ť lives. In fact Facebook could be the big IPO disappointment of the year.
The title of this piece says that we are not in a tech boom, but on reflection, perhaps we are always in a tech boom. Technology is the future, thus it holds a certain fascination that a utility stock or a supermarket does not. By its nature it could attract irrational exuberance as investors have to take a leap of faith when trying to figure out what will be the winner of the future. Apple may be in its fourth decade of existence, but in recent years its version of the future has been near flawless, hence its share price gains.
Image — Customers look at the new iPad at the Apple Store in the Eaton Centre shopping mall in Toronto, March 16, 2012. REUTERS/Mark Blinch