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April 16 ,2014 | by Sarah Parkin

Are we really in a Tech Bubble?

Tech Bubble

The technology sector has apparently gone from strength to strength recently – but is it a bubble and if so, will it burst?

When the company behind Candy Crush Saga said it was planning an initial public offering (IPO), many commentators saw the initial valuation of King Digital Entertainment Plc at $7.6 billion (£4.54 billion) as over-ambitious. By the time shares had fallen by over 15 per cent at the end of its first day of trading, it seemed they had been proved right.

 

A number of other tech and ecommerce companies have followed in King’s footsteps since then – Just Eat, AO World and Boohoo have all floated recently and all are now trading below their starting share prices. So it may not be surprising that there is an ongoing debate about whether the technology sector is experiencing a bubble and if it will burst soon.

Established companies have also taken hits in recent weeks - as the Telegraph reports, Amazon, Facebook and Google were all down four per cent or more in just one day on April 10, while these corrections have been felt by firms around the globe. But does this really mean that the technology market is about to collapse?

It stands to reason that in a world which depends heavily on technology, there will always be at least some demand. As a result, well-run companies with strong products that fulfil an important need are very unlikely to disappear.

 

In many ways, the fact that big companies are trying to diversify by acquiring younger rivals and constantly seeking to improve the user experience demonstrates that they are aware of this too. If Facebook owns WhatsApp, it does not need to be as concerned about the competition.

Some companies may be able to point to specific issues to explain their disappointing share prices. For example, investors are likely to have been worried that King would not be able to reproduce the success of a game like Candy Crush. But it seems that overall, the most common explanation for so many companies going the same way is unrealistic valuation.

According to Management Today, banks are so desperate to attract IPOs that they are over-valuing companies, effectively setting firms up for a fall. On the other hand, they are basing their calculations on comparisons with other companies that just don’t stand. The market may see some corrections, but it looks as though the technology sector will keep surviving.

Sarah Parkin

Sarah Parkin used to work as News Writer for LSBF.  Sarah is specialised in finance, technology and business news.

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