At first glance, tech stocks may appear to have missed out on the great stock market rally of 2007. When the Dow Jones Industrial Average set a new all-time high on Oct. 2, the Nasdaq would have had to gain more than 100 percent to match its best level ever.
Still, for a lot of reasons, 2007 was a strong year for technology stocks, with investor enthusiasm spilling over from big-name headline grabbers such as Google and new product fever driving the likes of Apple to new heights.
Tech stocks had their share of volatility during the year as well, but investors appear to believe that the long-range outlook is good, a view based on the idea that global demand for all things tech is only going to continue to grow.
A Safe Harbor?
In some ways, the technology sector, once viewed as a risky bet, took on the sheen of a safe harbor when the housing market took a turn for the worse and the subprime mortgage fiasco rattled financial services firms.
A number of factors help explain why technology stocks were on pace as of early November to outperform most other sectors for the year, including:
- Buybacks. Many tech companies, with plenty of cash on hand and believing their shares to be undervalued in 2006, invested heavily in their own stock during 2007, helping to drive up prices.
- International exposure. As investors grew concerned that a U.S. recession was in the offing, many sought out companies with exposure to overseas markets, a group that happens to include many tech players.
- Strong results. From IBM to Google, HP and Intel, many tech companies posted at least one quarter that easily beat expectations during 2007. Even companies that had been struggling, such as Dell, showed signs of better performance by year’s end.
While the overall trend was positive, some stocks set the pace, marking new all-time highs on investor enthusiasm.
Apple shares began the year trading at about US$83. With excitement about the iPhone launch building, it passed $100 per share in May and by Nov. 30, the stock was trading above $182 per share, a new all-time high.
Tech stock star Google came into the year at $467 per share and ended November at $693 — after passing the $700 mark earlier in the month.
Even Amazon flirted with its dot-com boom highs, rising as high as $101 during the year and ending November at $90.56, a gain of more than 150 percent from where it began 2007.
Proof that investor support for technology remains strong lies not only in the stock market trends, but also in the feverish pace of merger-and-acquisition activity seen during the year, Keybanc Securities Investment Banker Michel Bayard told the E-Commerce Times.
“That tells me investors see value and are excited about the future prospects of some technology sectors,” Bayard said. While high-profile deals focused on Internet advertising and social networking — with Microsoft’s stake in Facebook giving that company an eye-popping valuation of $10 billion — Bayard sees investors also interested in business intelligence software and technology solutions that help advance life sciences and healthcare.
A Dazzling IPO
While the credit crunch slowed private equity somewhat in the second half of 2007, investors continue to seek out opportunities in technology, a sign of confidence that exit strategies, including initial public offerings, will be available in the near future, Bayard added.
Indeed, 2007 will also be remembered as a decent year for technology IPOs, with EMC’s spinoff of VMware the standout highlight — that stock was up as much as 100 percent during the year.
Other offerings got a more lukewarm reception, such as the Virgin Mobile IPO, which not only failed to ignite much investor interest — it has traded below its debut price since its October debut — but also resulted in a lawsuit from shareholders who claim the company overstated the rate of the virtual network operator’s growth.
Given the nature of the tech sector, any discussion about tech stock enthusiasm seems to lead directly to questions about whether the pre-2001 dot-com bubble is in danger of being repeated.
“The last tech bubble was built on growth and speculation,” said Alan Klayman, the founder of MyIncomeStrategy.com and a former Fidelity trader. “I think that the market itself is more value-driven than it has been in quite some time, and that individual results and their relative expectations … are driving their respective prices,” he noted.
“Keep in mind that six years ago, when the Dow was at or near its current level the Nasdaq was at 5000 or so and is now sitting in the 2600s,” Klayman told the E-Commerce Times. “We are far from that speculative phase.”
If a bubble does develop, it will not be because of investor exuberance, but more likely because of the speculative fervor focused on the Web 2.0 sector Tom Arnold, an assistant professor of finance at the University of Richmond’s Robins School of Business, told the E-Commerce Times.
“I think the stocks will trend upward in the near future and may become overvalued in some segments as acquisition interest could lead to unjustifiable speculation,” said Arnold.
“Unlike the previous tech bubble, investors have more experience with what the Internet has to offer and what is the potential technology “saturation point” of the product consumer,” he added. “This does not mean these investments are necessarily less risky than in the past, but that investors understand and can mitigate the risk better than they had in the past.”