Apr 20 2012
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Why we aren't in 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 last month, its market capitalisation hit USD 600 billion, only the second company to see its market cap go that high. So it appears as if everyone wants a bite of the proverbial apple.
There is a dangerous precedent for markets 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 USD 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?
It's not just Apple'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 Portugal's annual GDP), it is not the only tech stock on the block. Research In Motion (RIM), which makes the BlackBerry, has seen its share price fall 77% over the past year. Nokia has seen its share price dwindle from USD 9 per share in April 2011 to below USD 4 today. So not every company has seen its share price surge nearly 90% like Apple's has. Hence the Nasdaq remains more than 30% below the peak reached in 2000 before the dotcom house of cards collapsed.
Facebook's IPO later this year is likely to attract a lot of attention, it may not meet expectations. Although Facebook is a fascinating story (you'll know what I mean if you have seen "The Social Network") I'm not totally convinced about its business model and believe that users may dwindle as even the hardcore Facebookers get bored of the minutiae of their "friends"' 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.
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