From time to time, Morningstar publishes articles from third party contributors under our "Perspectives" banner. Here, Jamie Berry, founder and chairman at Berry Asset Management, warns against investing in technology. If you are interested in Morningstar featuring your content, please email submissions to UKEditorial@morningstar.com.
Observers of bubbles and manias will be watching closely the purchase of Instagram by Facebook for $1 billion, and the upcoming listing of Facebook at the eye-popping estimated market capitalisation of around $100 billion. Not bad you may say for a company making $1 billion a year in profits - although Instagram win the prize for stretched values, with barely any revenue stream, let alone profitability.
What is going on? Simply put, this is all to do with the race to control social networking. Instagram is almost certainly not worth $1bn, but it has 30 million users, most of whom probably use Facebook too, and between these happy snappers they upload no less than five-million photos a day onto the Instagram website, all via smartphones…… an area where Facebook may be behind the curve.
Control of this sharing of photos from smartphones is crucial. If Facebook lose their grasp of social networking via portable devices, a crucial part of which is photos, things could unravel for them very quickly. If it hadn’t been Facebook getting the cheque book out, it might have been Google (GOOG) or even Apple (AAPL), and Facebook simply cannot allow this to happen.
For those who grew up delivering a can of film to Boots and being told to come back in a fortnight, the pace of change in this area of our lives is breakneck. From an investment standpoint, pursuing these bubbles is potentially dangerous: a new technology bubble is forming nicely, especially at the individual stock level, and it has little appeal to us as long-term preservers of wealth.
It is hardly surprising that some investors, ourselves included, prefer to leave the whole dot.com segment of the market to braver souls. Values in the old fashioned sense are almost impossible to pin on companies, and fashions can change very rapidly, leaving what looked like valid business models well and truly high and dry. It is not for nothing that Warren Buffett sticks to businesses that he understands. When he bought Wrigley’s Chewing Gum, he happily proclaimed that however much he thought about it, he didn’t think the internet would change the way people chew gum. Facebook’s Mark Zuckerberg is probably wishing his business model was as simple.
Jamie Berry is founder and chairman at the high net worth boutique wealth management firm, Berry Asset Management.
This article was provided by Berry Asset Management. The views contained herein are those of the author and not necessarily those of Morningstar.
