We’re not witnessing the stirring of another Dot-com tech bubble

George O'Connor
IT MAY be chilly outside but, for those of us analysing the UK tech market, it couldn’t be hotter. It was a stellar year in 2013 for the sector. In the US, the Nasdaq index of technology-focused stocks reached highs last witnessed in 2000 – at the height of the Dot-com boom.

Here in the UK, such exuberance was less evident but performance was nevertheless strong. The FTSE Techmark All-Share index surged to nearly 2,900 after starting the year at around 2,200. Tech stocks were some of the best overall performers: Blur Group posted a total share return of 650 per cent in 2013 and WANdisco delivered nearly 200 per cent over the period. And the rally hasn’t reversed in 2014 (despite Nasdaq jitters, and some disappointment over Apple’s results). Avid watchers of all things tech will have been drawn to the annual Las Vegas tech-fest CES earlier this month. I’m told that it was one of the most bullish and upbeat gatherings for many a year.

With all this good news, however, it’s unsurprising that there are a growing number of naysayers. More and more observers are opining that we are entering dangerous “bubble territory”. In my opinion, they couldn’t be more wrong. Marc Andreessen, the US technology entrepreneur and founder of Netscape, recently said that people who think we are in a 90s-style tech bubble “don’t know what they are talking about”. He is spot on. Current circumstances are very different to those we saw at the turn of the Millennium.

There is a three stage model for how companies adopt new technology: initially they replicate the old way of doing business with digital tools, making processes faster and cheaper, replacing people with machines and reducing error rates. Then, companies change underlying business processes and start to do new things – think Amazon and eBay. And in the final stage – dubbed “rip up the rule book” – companies transform their businesses and do things in a dramatically different way.

At present, the tech sector is in transition, where development focus is moving from collaboration – where the presentation of data was key in a collaborative setting i.e. “look at me!” on Facebook and Twitter – to a period best defined as “information curation”. Here, we assume that the industry places greater emphasis on the management of information so that information is reused and transacted upon. In short, we are not seeing irrational exuberance based on no fundamental developments. The underlying dynamics of the tech sector in 2014, therefore, are a long way from those that drove the bubble more than a decade ago.

It is true that sentiment has overshot fundamentals since the middle of last year. But unlike 13 years ago, the fundamentals underpinning most company valuations remain robust. Look at Gartner’s forecasts for global IT expenditure in 2014, for example. It predicts that spending by companies on software will be particularly strong – nearly 7 per cent growth over 2014.

There will be bumps in the road. But far from indicating the collapse of the market, in the main they are likely to be buying opportunities. 2013 was a hot one and 2014 has started in similar vein. But I do not think anyone following the global tech sector is about to be burnt. Quite the opposite.

George O’Connor is technology analyst at Panmure Gordon.