Remember the dotcom boom? Remember the heady days of the late 1990s, when technology stocks went through the roof and spotty geeks became multimillionaires overnight?
It was a crazy time, that saw venture capital poured into fledgling tech companies with unproven business models and the doomed online fashion retailer Boo.com blow US$188 million (Dh690.5m) in six months.
The bubble burst in March 2000. Thousands of start-ups folded and were instantly forgotten. The spotty geeks went back to school. WorldCom filed the third-biggest bankruptcy in US history. In the eye of the storm, AOL completed its disastrous merger with Time Warner, dubbed "the worst in history".
Dotcom became dotbomb and along the way, destroyed $5 trillion of market value in two years. It forced the then US Federal Reserve chairman Alan Greenspan to slash interest rates to avoid a recession, fuelling the property bubble that ended in the credit crunch.
Stock markets still haven't recaptured their millennial highs.
We wouldn't want to go through that madness again. Except we are. Right before our very eyes. The reboot even has a name: tech bubble 2.0. You've been bitten before; should you fight shy this time?
Analysts have been talking up a technology rebound for some time, but 2011 is the year it went public.
Big name dotcom flotations are back - and so is the hype. In May, LinkedIn, the social networking site, launched its initial public offering (IPO) at $45 a share, which put the company valuation at about $4.3 billion. Its shares instantly soared to $120, plunged to $80, then rebounded to just above $100, reminding us how volatile tech can be.
Groupon is the next big tech IPO. Last year, the social-buying website rejected a $6bn bid from Google. It is planning to go public later this year, priced at between $15bn and $20bn.
Groupon has been called the fastest-growing company in history and its numbers are certainly mind-boggling. In the first quarter of 2009, it pulled in just $250,000 of revenue. Two years later, it earned $650m. One million people a day sign up to its e-mail list.
Zynga, the online social game company, is also planning to float. You may never have heard of it, but it has been valued at between $15bn and $20bn.
It isn't hard to see why investors swoon over global online businesses. They can win hundreds of millions of customers in a matter of months. If they can "monetise" those users (an ugly tech-boom phrase we're hearing again), the rewards are vast.
But so are the risks. Monetising users is as difficult (and ugly) as ever. As the music industry and Hollywood moguls have discovered to their cost, people are reluctant to pay for anything online. And the massive grab for market dominance that every dotcom feels obliged to undertake is expensive. A decade ago, we saw where growth at all costs leads.
There is certainly lots of dotcom froth out there, but there is plenty of body as well, says Ben Rogoff, who has managed the Polar Capital Technology investment trust since 2006. "The froth is all in social media and social networking, with sites such as LinkedIn, Groupon and Zynga," Mr Rogoff says. "This evokes uncomfortable memories from the 1990s."
Social networking isn't a bubble yet. "The story is real. People spend so much time online these days. Revenue growth is rapid, these companies are bringing in billions of dollars. The question is, how much do you want to pay for them? And just how sensible are these businesses?"
Mr Rogoff won't invest in LinkedIn, Groupon or Zynga. "I like LinkedIn, but I couldn't make the numbers work at $90 a share, even by applying some fairly liberal growth expectations. Zynga looks overvalued. Groupon worries me. I have no idea of its longevity. The barriers to entry are too low, which means it could be overtaken by competitors."
He has also avoided Renren, labelled the Chinese Facebook, which recently floated in the US at $743m. Shares in the company quickly shot up to $18, more than double their initial valuation, but now trade just below $11. "Renren was recently trading at 25 times sales - that is so 1990s."
There are two social-networking sites he would consider. You definitely know their names: Facebook and Twitter. "Facebook has 600 million users. Twitter has 200 million. They are only just beginning to monetise this vast user base. The drawback is, you can't buy them."
Facebook is rumoured to be floating sometime next year and has been valued at up to $70bn. "Everybody wants a piece of Facebook," Mr Rogoff says. "It is a fantastic business. Investors are buying LinkedIn, Groupon and Zynga because they can't buy into what they really want - and that's Facebook."
Mr Rogoff is more sceptical about Twitter. "Just 10 per cent of its users generate 90 per cent of tweets. This means the number of active customers isn't as large as it first appears and that could limit its potential."
Mark Dampier, the head of research at Hargreaves Lansdown, the largest independent financial advisers in the UK, is also wary about the social-media frenzy. "I don't understand the notional value in LinkedIn or even Facebook. How much are these companies really worth? It is impossible to say. Are they even technology stocks? Arguably, they are media. You have to understand what you are getting into and I'm not sure many people do."
Ignore the hype and look at the fundamentals, Mr Dampier says. "Every company has exactly the same challenge, which is to sell something people want and, crucially, are willing to pay for. Customers must also want to keep on buying it. It is too early to say whether social-media companies can really do this."
We're not in a tech bubble yet, says Dan Dowding, the chief executive (Middle East & Asia) at IFAs Killik & Co in Dubai. "The Nasdaq index peaked at over 5,000 in March 2000. Today, it stands at just 2,823. So there is still some way to go."
The technology revival fails one key test of a bubble. "You know you're in a bubble when everybody is talking about the boom, even your taxi driver," Mr Dowding says. "Right now, investors are cautious. They aren't throwing money at start-ups without knowing how they will generate profit, nor are we seeing a rush of unproven companies trying to go public."
But there are bubble characteristics. "Some valuations are starting to look irrational. On its first day of trading, LinkedIn was valued at over $8.8 billion, despite generating profits of just $15 million," Mr Dowding says.
Another big difference this time around, he says, is that despite all the hype, IPOs for high-growth internet-based companies are thin on the ground. "There is a degree of pent-up demand, which has been pushing up valuations."
Before investing, ask yourself some fundamental questions, Mr Dowding says. "Is there an attractive market for the company's product? Does it have significant market share? How much management experience does the team have? Is the company growing and profitable?"
Investors may hate bubbles (at least after they have burst), but, Mr Dowding says, they can create lasting value. "They suck in cash that is used to invest in new technologies, ideas and products. Much of the money made between 1995 and 2000 has been recycled into the next generation of tech start-ups."
And not every dotcom has bombed. Big names such as Amazon, eBay and Yahoo! are still defying gravity.
Many of the big claims made during the tech bubble have actually come true, says James Thomas, the regional director at Acuma Wealth Management in Dubai.
The internet really has revolutionised the way we live and work, just like those visionary geeks said it would. "During the dotcom bubble, technology companies were limited by web access and computer power. We are all far more tech savvy than a decade ago, so online start-ups have far greater potential today."
Google has shown that you can make money from tech. "For every big success, scores of companies will sink without trace, but this doesn't just happen in the tech sector."
Technology is likely to remain volatile and you shouldn't invest more than 5 per cent to 10 per cent of your money in this sector. "You might have more exposure to technology than you think. A generalist fund is likely to include some tech companies, such as Apple, Google and Microsoft, simply because of their size and presence," Mr Thomas says.
Specialist technology investment funds have enjoyed a storming few years. Herald Worldwide, the specialist offshore technology fund, is up 26 per cent over one year and 98 per cent over three years. Mr Rogoff's offshore vehicle, Polar Capital Global Tech, is up 21 per cent over 12 months and 82 per cent over three years. Another tech fund available offshore, Franklin Templeton Franklin Technology, is up 33 per cent over one year and 46 per cent over three years.
Herald Worldwide's top 10 holdings are dominated by traditional technology stocks such as Apple, Samsung Electronics, Oracle, Google and Intel.
Polar Capital's top 10 holdings also include Apple, Google, Oracle and Samsung, as well as Microsoft.
Mr Rogoff is steadily repositioning his fund to take advantage of what he believes will be the next great tech revolution - cloud computing.
This helps businesses to save money by storing their data remotely, in a cloud, rather than in their office block. "We are on the cusp of a major transition. Growth estimates for cloud computing are far too conservative. It will stagger people," Mr Rogoff says.
Currently, 10 per cent of business computing is done in the cloud, he says. "But it takes up just 2 per cent of IT budgets. That kind of deflation is unprecedented. There will be huge disruption, but at the end of it, we will be doing things on computers we never dreamed of, and the overall market will increase."
So are we in a technology cloud, rather than a bubble? Flying high, but with no idea where we're going? We could be.
Technology excites investors because, as the past decade has shown, the sky is no longer the limit.
But remember to spread your risk and don't fly too close to the sun, or you could come crashing down to earth. Again.
pf@thenational.ae
