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Tech stocks are hot

Nicola Mawson
By Nicola Mawson, Contributor.
Johannesburg, 20 Mar 2014
More large technology deals are expected to be in the listing pipeline.
More large technology deals are expected to be in the listing pipeline.

New technology listings are the in thing as newcomers to the bourse - such as Alibaba and Facebook - are increasingly attracting high valuations, yet behind the scenes many smaller ICT entities are also joining the queue.

As a result, technology companies are making up an increasingly large percentage of companies waiting to raise funds through listings, and there could be some great next big things among that list.

However, as more companies are in newly-created fields - such as social media - they have yet to prove themselves to investors and those wanting to get rich quick could find themselves in the reverse situation, analysts warn.

One of the biggest listings this year will be when China-based e-commerce group Alibaba debuts in the US. Media reports suggest the company will be worth between $140 billion and $200 billion when it makes its initial public offering (IPO).

At the top end of that range, it would be the second largest listed Internet company after Google. However, Vestact analyst Sasha Naryshkine points out Alibaba's potential raising of between $18 billion and $20 billion is a "massive" amount, making it quite expensive.

Another recent large hit was Facebook, which listed in May 2012, at $38 a share, the top end of its expected listing price; giving it a price to equity ratio that made it seven times more expensive than Apple. Although its shares did come off sharply, they have since rebounded and are trading at $68.24.

Shining stars

Data provided by Jay Ritter, Cordell professor of finance at the University of Florida, shows the largest IPO in the last decade in the US was Visa, which made $17.87 billion on debut in 2008.

Also included in that list is Facebook ($16 billion in 2012), Deutsche Telekom at $11.3 billion in 1996, AT&T at $10 billion some 13 years ago, France Telecom at $6.6 billion in 1997, and Infineon Technologies at $5.2 billion in 2000, taking technology stocks to six out of the top 11.

Ritter says Alibaba is "likely to be among the largest IPOs in the US ever". Technology entities are also among those that have provided the largest returns on day one of their listings, notes Ritter's data.

Independent analyst Paul Booth says technology stocks are "currently shining" in terms of IPO values as there is a desire from the market for good value shares.

Infineon saw its stock leap 126% on the first day, while Visa gained 28%, Deutsche Telekom moved up 13.8%, and France Telecom improved 10.6%, according to Ritter's data. Non-technology company United Parcel Service gained 34.76%.

IPOScoop.com says "tech IPOs have arrived" as six of the 11 companies gearing up to list on the latest new-issues calendar are technology firms. "Since the beginning of November through 14 March, the average gain for all tech IPOs was 119.8% from their initial offering prices."

Yet, says the site, the bubble is not here yet. It points to the fact that, in the past three months, 92 companies have indicated they wish to list, of which four are technology entities. "Nope - no tech bubble there."

Buying potential

Ovum analyst Richard Hurst says the "key issue here is that the tech stocks tend to be more high profile and catch the attention of institutional, as well as retail investors".

Hurst adds the popularity of these stocks is also based on future earning potential, which can often be exponential and beyond comparison to other more so-called mundane businesses. "However, having said that, often we will see what I call the 'quiet giants' slip through their IPOs without so much of a murmur in the market."

Booth says as many as 35% of new listings on the cards are set to be in the technology sector. He expects more "big buster" deals and quite a few smaller companies to debut, adding technology stocks will "probably be the big boys of the future".

Warning bells

If ICT stocks are picked correctly, they will offer faster growth than other sectors, Booth notes. However, Imara SP Reid research analyst Danilo Pagani says "a human being's attraction to getting rich quick will always fuel the hype that new tech products and services bring".

Investors are picking technology stocks because of the returns they offer, says Ovum analyst Richard Hurst.
Investors are picking technology stocks because of the returns they offer, says Ovum analyst Richard Hurst.

"Misplaced judgment can cost dearly once the true value of a company is realised. It seems as though all rational thinking has gone out the window as prices continue to rise while promises of earnings are made."

There will continue to be an impetus of listings, says Hurst. "I think that perhaps the next wave will revolve around mobile and social media companies in SA and the emerging markets."

However, Booth is concerned about social media listings, because these offerings may not be sustainable, as people change what flavour of social media they prefer "at the drop of a hat". Social media companies do not have enough of a history, and he would hedge his bets heavily when pondering a stake in those companies.

Imara SP Reid analyst Warwick Lucas says it is certainly true that the ratings enjoyed by social media places the stock at risk of a severe price reversal on any bad news.

Pagani adds the value of a tech stock IPO says more about its potential to exploit a large user base than it does about the particular company's popularity. He also says people buying the stock could be unsophisticated investors and may not look at potential earnings. "They merely want to be a part of the product they find themselves and their friends using."

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