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Henderson's O'Gorman: tech stock valuations 'terrify' me
by Matthew Goodburn on Oct 29, 2013 at 10:25
Henderson Global Technology manager Stuart O’ Gorman thinks the tech sector is heading for bubble territory once again as the combination of cheap credit and investor hype combine to push valuations of many small cap tech stocks to ‘nosebleed’ valuations.
O’Gorman, who runs the fund alongside Ian Warmerdam, told investors: ‘I’ve lived through the last tech bubble and seen loads of phenomenal companies that were going to change the world, and I’ve seen the valuations that were put upon them.
‘We are getting to the stage now where a lot of valuation multiples are extreme. Particularly given how shaky the global economy is, I think this is pretty terrifying because the valuations are starting to assume that these companies win, that their competitors don’t react with pricing [changes] or their deflation doesn’t end up making their end market less profitable.
O’Gorman cites a range of companies including Workday, Tableau, Splunk and Netsuite that have been in existence for some years but which are still not turning a profit despite trading on price to sales ratios of between 23 and 38 times.
‘They keep on having great sales but profitless sales. The major problem with the credit bubble we are causing is that it allows too many profitless businesses to exist.’
O’Gorman says the same analogy can be drawn from what is happening in China after travelling to the country last month to meet Mediatech, which supplies the silicon for white box Chinese handsets.
‘It is not just happening in areas like the cloud, it is also happening in handsets. [Mediatech] freely admit that most of their customers don’t make a profit but they are funded by the local Chinese government and some by the army. It will end in tears for investors. ‘
He points to a number of recent IPOs in the sector where companies are floating at what he calls ‘nosebleed valuations such as FireEye, Rocket Fuel and Benefitfocus.
‘We are back to the days of 50% plus IPO returns for really hot stocks. A lot of people are piling into these companies but they don’t know what they do, but they know it is very exciting. That terrifies me and I think it can go badly wrong.’
He points out that on the flip side, a lot of profitable large cap tech stocks are trading close to all-time lows as they are seen as too dull despite being cash rich and producing relatively steady and recurring revenues.
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