With Lending Club’s IPO capping off another string of tech floats, is the sector in a bubble?

Jasper Lawler is market analyst at CMC Markets, says Yes.

Tech stocks are not seeing the same excesses as in the dot-com boom. But there are some clear parallels to be drawn, and lofty valuations support exercising caution. The dot-com bubble was characterised by the boom and bust of Pets.com, and in 2014 we’ve seen the eerily similar Pets at Home float. Things have changed, however. Pets at Home has an offline presence, and an unrealistic initial valuation left shares well down on the listing price. But wider valuations did appear to break new bubble-like ground in 2014. Alibaba had the world’s largest ever IPO, raising $25bn (£15.91bn), and Facebook bought WhatsApp for $19bn. Investors have already called “bubble” on Google, Twitter and Amazon, whose stocks have all fallen over the past 12 months. If earnings at Apple, Facebook and Alibaba don’t justify rising shares in 2015, they could be the next to fall – and they may bring investors’ enthusiasm for tech stocks down with them.

Gemma Godfrey is head of investment strategy at Brooks Macdonald, and an official contributor for CNBC. @GCGodfrey, says No.

Areas of overvaluation don’t mean the entire tech sector is in a bubble. The clear differentiator is profitability, and the risk is concentrated in the IPO market. It’s true that a worryingly high percentage of companies have listed their shares on the stock market without a clear strategy for generating revenues. Moreover, while some deals have been significant in size, they have been fewer in number, leading to over-subscription and rich valuations. Nevertheless, this does not negate the investment opportunities that exist elsewhere in the sector. These are companies that generate profits, have strong balance sheets, a track record of success and a sustainable strategy to create value. Importantly, tech is in a sweet spot. IT spend is surging, while the risk of a rate rise has been pushed further out. There are clear investment opportunities away from the areas of high risk.

Related articles