Google's (GOOG) earnings last week had been seen as a bellwether for the wider technology sector. As it was, they came in behind expectations, prompting further investor unease over some highly valued parts of the technology sector.
The technology sector has come under scrutiny in recent weeks. A series of high profile IPOs coming to market at punchy valuations raised questions over a second technology bubble. Investors grew nervous, sold out of many high profile names, leaving some stocks 30% off their highs. Investors now need to examine whether this is the start of a broader sell off for technology, or whether the rout merely corrected some imbalances.
With hindsight, a sell-off in certain high profile companies had started to look inevitable. Twitter's (TWTR) initial public offering saw shares over 90% higher at one point during its first day of trading. This was in spite of some question marks over how it was going to monetise its vast user base. Even home-grown group AO.com (AO.) saw shares rise 44% on their first day's trading in February of this year.
King IPO Causes Jitters
The rot started with the King IPO (KING), the maker of Candy Crush. The shares struggled in their first day of trading and have failed to regain their launch price since. Other high profile technology names such as Google, Facebook (FB) and Twitter have all seen their share prices slide, some by as much as 30% since the start of the month.
However, the picture for technology funds is a little different. The average fund in the IMA technology and telecoms sector is up 11.14% over the past year and down 3.6% for the year to date. This ranks it alongside Asia Pacific ex Japan in the performance tables. Investment trusts have suffered slightly more – down 11.7% for the year to date, but still up an average of 17.7% over the past 12 months. The fact that funds have not suffered precipitous declines suggests that most of them have been avoiding the bubbly IPO market, and have been invested elsewhere.
IPO Market 'Broken'
Walter Price, manager of the RCM Technology Trust (RTT), for example, did not participate in the most recent round of IPOs. He says that a number of factors are distorting the IPO market, including the relatively small float sizes and heavy marketing efforts by some groups, which create huge demand for a very small supply.
He says that valuations still, in the main, look too high for many of these IPOs: "The IPO market is flaky at the moment and may be broken. There are some decent high growth companies, but valuations are too high and investors are unlikely to generate strong performance."
Still Opportunities Elsewhere in Technology Sector
However, he adds there are also parts of the technology market that still look relatively lowly valued compared to the wider US stock market: "The large technology companies are still on low valuations." He has taken on more exposure to names such as IBM (IBM), rotating away from some of the higher growth companies in his portfolio.
There are also areas of the technology market that have strong growth prospects, but have not attracted the high valuations of the newly-launched internet names. This might include security groups such as Palo Alto Networks (PANW), which are benefiting from a significant increase in demand for internet security.
The technology market is diverse. The rout may not be over for the highly valued internet groups, as investors adjust their expectations, and the IPO market for technology companies generally is not working as it should. That said, there are opportunities elsewhere in the technology sector, where valuations are not as demanding.
