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Another dotcom bubble? That’s dotty, says Rogoff

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Another dotcom bubble? That’s dotty, says Rogoff

Polar Capital Technology (PCT) manager Ben Rogoff has dismissed fears from some quarters of a repeat of the tech bubble that crashed markets at the turn of the century, despite a stellar year for the sector.

Shares in Rogoff’s trust soared 67.3% in the year to the end of April covered by full-year results released today, with the move from a 6.5% discount to a small premium over net asset value amplifying returns.

Technology stocks have been big winners of the last 12 months, leading some to question whether the sector is entering the bubble territory last seen at the beginning of the century.

Critics draw parallels between Amazon’s (AMZN.O) swoop on Whole Foods (WFM.O) and AOL’s mega-merger with Time Warner, a match dubbed the worst deal in history and a high watermark of the excesses of the dotcom era.

And they look to the frenzy that accompanied the flotation of Snapchat parent Snap (SNAP.K), whose shares soared 60% in their first two days of trading in March, before crashing, falling below their $17 flotation price yesterday, amid mounting losses and slowing user growth.

Earnings driving shares

But Rogoff believes those fears are wide of the mark. While the technology sector has rallied strongly, shares have risen alongside higher earnings, and in some cases, such as Alphabet (GOOGL.O) and Facebook (FB.O), lagging that growth.

Valuations reached their most recent peak in 2014, and have not yet returned to those levels despite their strong showing over the last 12 months, he said.

‘After a sustained period of sector outperformance, it is understandable why some people have given in to the temptation to make a comparison between today and the late 1990s technology bubble,’ he said.

‘Quite aside from the fact that bubbles tend to be accompanied by euphoria, rather than healthy scepticism, this time our sector’s progress has been primarily driven by earnings rather than “eyeballs”, hope and late-cycle experimental business models.’

He pointed to Google owner Alphabet, whose earnings have grown 23-fold since flotation in 2004, but whose shares have risen around half that.

And he said parallels between Amazon’s acquisition and AOL’s doomed purchase were ‘too easy and ultimately fallacious’.

‘While the market cap of Amazon and the $13.7 billion [£10.6 billion] purchase of a “bricks and mortar” company by an online leader may rhyme with the late 1990s, Amazon today has 28 times more revenues and 15 times the user base than AOL at its peak,’ he said.

‘Most telling is that AOL used stock to fund its deal which subsequently fell almost 90% over the coming years as the internet bubble burst and AOL’s business model imploded. In contrast, and in a sign of how far the internet has come since the late 1990s, Amazon is paying cash.’

Not that Rogoff is complacent about the risks of euphoria surrounding tech stocks. He didn’t take part in the Snap initial public offering, viewing the stock as a binary bet he was unwilling to take.

‘The thing we learned post-Twitter (TWTR.N) is there are a finite number of Facebooks, of [social media] platforms,’ he said. ‘Very few companies are able to achieve that.’

Snap was at too early a stage in its development, and making too many losses, to interest the manager, who tends to invest in more mature stocks and typically doesn’t house many loss-makers in his portfolio.

Last year was a record year for mergers and acquisitions (M&A) in the technology sector, with $467 billion changing hands, and the Polar Capital trust enjoyed its own record, with nine of its companies snapped up over the 12 months covered by the results.

Red flag buys

But while Rogoff (pictured) has been a beneficiary of all this buying, M&A can also serve as a red flag when he owns a buyer he believes is acquiring as a means to reposition a business otherwise struggling for growth.

He points to Intel’s (INTC.N) $15 billion acquisition of driverless car technology firm Mobileye, stocks he both owned, news of which prompted him to further sell down his Intel stake. Oracle’s (ORCL.N) $9.3 billion bid to boost its cloud computing capabilities by buying Netsuite, or Cisco’s (CSCO.N) $3.7 billion AppDynamics buy were similar warning signs,’ he said.

He is keen to ensure his portfolio is on the right side of the cloud computing divide. Shifting the trust towards cloud computing pioneers has been a longstanding process, and Rogoff believes the rise of this technology will rapidly gather pace over the coming years.

While it has taken 11 years for cloud computing to account for 20% of computing work, its growth is predicted to accelerate, replacing traditional office-based computing rather than working alongside it.

‘All technology begins as complementary and ends as a substitute,’ he said, pointing to estimates that cloud computing could account for 80% of computing workload by 2024.

‘This is the “beginning of the end for traditional information technology (IT)” and the practitioners know it.

‘As such we anticipate significantly greater disruption than we have witnessed thus far with over $1 trillion in IT spending shifting to new areas by 2020 as the cloud captures virtually every incremental workload. This is likely to prove highly deflationary as every $1 spent at Amazon Web Services is said to be equivalent to $4 lost to traditional IT.’

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