The seemingly endless enthusiasm for tech company IPOs has, we are told, come to an abrupt halt. Earlier this year we saw shares in the newly floated Boohoo drop below its flotation price of 50p, while Just Eat and AO World also suffered similar problems. Even well-established tech giants such as Facebook, Twitter and LinkedIn have taken a hit. The momentum of investment in the tech industry may be stalling, but the comparison drawn with the dotcom bubble is a lazy one.
The infamous bursting of the dotcom bubble in the early noughties occurred due to the realisation that many of those companies consisted of not much more than a flimsy idea with hope tacked on. This cannot be said for the majority of companies operating in the tech industry today: many ‘tech companies’ are simply traditional businesses operating through a digital medium, whereas companies involved in technological innovation are the product of years of careful R&D. Whilst the hype about ‘tech’ may be dwindling, price readjustments need not prophesise doom for the entire sector.
The label ‘tech company’ can be misleading; it is seemingly applied to any company which has some technological element, however small. The term can give a mystifying veneer to companies, masking their bread-and-butter business credentials. For example, the tech label has been stretched to cover ecommerce businesses such as Asos. Whilst Asos operates online and has various technological interfaces it is, in essence, a retailer and by the time of its IPO it had a credible trading history, an existing customer base and was already a household name. Such companies are no more than the upgraded versions of traditional businesses. The price fluctuation in the market is more like a corrective process, valuing these companies in isolation from the tech hype - such correction does not render them valueless.
What is more, many ‘tech companies’ in the traditional sense (eg. a company whose business is the creation of unique systems or technological processes) should not be dismissed in the same breath as the dotcoms of yore. For example, the digital consumer engagement company Eagle Eye, which floated on AIM in April, has 38 patents, a blue chip customer base and 10 years of research and development to its name.The potential profitability of these companies is not just a figment of the imagination. They are credible investments even in the absence of hype; this could not be said for many of the companies floating at the time of the dotcom bubble.
This does not mean that there hasn’t been some overvaluation. There has. And it is right to hesitate when companies have a market capitalisation far beyond their trading profits (at IPO Just Eat was valued at £1.5bn when its profits for 2013 were just over £10m). But this is the nature of hype - it distorts value. It is also the nature of hype that it comes in fits and bursts.
As the tech hype subsides, the market will readjust prices to reflect true value and in some areas this will mean losses. However, this process of correction should be a good thing, as optimism will then be replaced with critical analysis. Investors will look beyond the glitz and assess the commercial strength of these businesses in their own right. Unlike hoards of dotcoms, many tech companies have solid businesses that will withstand the evaporation of hype. Clearly not all tech companies will be successful, but that is the nature of the market.