When the dotcom crash hit the technology sector a decade ago, Mark Zuckerberg, the founder and chief executive of Facebook, was still in high school. Today, the social networking site is estimated to be worth more than US$33 billion (Dh121bn) based on secondary trading, and the market eagerly awaits it going public in what is predicted to be the biggest technology listing since Google in 2004. Although Facebook is still a privately held company, shareholders are able to sell stock through "secondary trading". These shares have been trading as high as $76 as investors rush to acquire the stock before the social networking service files for an initial public offering (IPO).
This currently gives Facebook an implied valuation of $33.7bn, more than five times the company's valuation last year, when it received its most recent round of funding. Although there has been speculation that the listing might not take place until 2012, the market believes that the 26-year-old Mr Zuckerberg might decide to go public well before then. Having seen Google shares rise from their listing price of $85 to higher than the current level of about $454, investors are anxious not to miss out.
At the same time, a rash of new companies are rising to challenge not only technology sector dinosaurs such as Microsoft and Intel, but also the new stars such as Google and Facebook. The global boom in wireless devices, location-based services, 3D graphics and speech recognition are all redefining the sector and providing opportunities for the next generation of star technology stocks. But fears that the US and other major economies may be slowing and the recession is far from over are making investors far more cautious than they were during the dotcom boom.
Paul Otellini, the chief executive of Intel, warned dinner guests at the Technology Policy Institute's Aspen Forum at the end of last month that the technology sector as a whole could be facing a bleak future unless some underlying problems, such as a negative attitude to business on the part of the US legal and tax systems, are addressed. "Our research centres were without peer," Mr Otellini said at the time. "No country was more attractive for start-up capital... We seemed a generation ahead of the rest of the world in information technology. That simply is no longer the case."
Analysts are even wary of rising stars such as Facebook in a sector that is perceived to be particularly vulnerable to economic downturns and where consumer tastes are notoriously fickle. "There are a whole lot of interesting internet-based companies," says Mike Davis, an analyst at the research company, Ovum. "Facebook, Google and eBay are all making money, although there is still a question mark over Facebook's earnings until it goes public."
However, Mr Davis is dubious about the long-term business models of some of today's rising technology stars and points to previous dotcom darlings that were destined to fall, such as the Facebook predecessor MySpace, bought in July 2005 for US$580 million by Rupert Murdoch's News Corporation. Last year the company laid off 30 per cent of its employees. "The longevity of these companies is still questionable," says Mr Davis. "MySpace was, after all, the Facebook of its day and young consumers can be fickle. Facebook's revenues come from advertisements and virtual payments called credits. The business case is, therefore, dependent upon continued growth. While Facebook has gone past the 500 million-user tipping point, it is not completely invulnerable.
"What makes Facebook vulnerable is the changing user interface for viewing its site, including different media and form factors. I believe that we will be moving further from the desktop/laptop paradigm. "I think that something like a future version of the iPad/tablet will be used to watch video, network with friends and that this new form factor may well encourage the use of location-based or video services that would allow a newcomer to steal market share from Facebook."
New technologies such as 3D graphics, high-powered, highly portable devices and speech recognition are all disruptive technologies set to redefine the user experience and open the door for the next generation of star internet stocks. "In the business context, the user interface is, I believe, set to change fairly radically," says Mr Davis. "The current displays of information are 2D. And while I do not think that there will be a total move to 3D business communications, the sheer volume of information now available demands a new interface. When we get really decent speech recognition the user interface will also change again.
"The iPhone 4 and its equivalents now have the kind of processing power needed to handle complex language and even dialects. Processing power was always a hurdle, but that is now no longer problem." The trick with making a fast killing in the technology sector is spotting the winners at the starting gate. Mr Zuckerberg launched Facebook from a Harvard University dormitory and Google began life as a research project in 1996 by Larry Page and Sergey Brin when they were both still students at Stanford University in California.
But this does not mean that every student with a bright idea is destined to become a billionaire. For every Google or Facebook, there are many thousands of failed dotcoms. And with a plethora of new start-ups and continued economic uncertainty for Western economies, even those companies that have established a track record in the technology sector's new growth areas are having a rocky ride in today's market.
The California-based Marvell Technologies, for example, makes chipsets for networking equipment, including the smartphone and tablet market. This year, Marvell's second-quarter profits almost quadrupled on strong sales, particularly in the mobile and wireless segment. Marvell projects third-quarter earnings of 41 cents to 44 cents on revenue of $930m to $970m ahead of analyst predictions of 40 cents a share on $945.7m in revenue.
"We believe we are ideally situated to take advantage of the shift to mobile information distribution - any content, anywhere, any platform - as such we believe our growth is anticipated to be primarily driven by the mobile and wireless end-market," says Daniel Yoo, a spokesman for Marvell. "We are focused on three main end-markets: mobile and wireless, networking and storage and the emerging green electronics market."
But, despite having as solid a business model as a Silicon Valley start-up could reasonably be expected to have, and having seen an immediate rise of 10 per cent on its share price after announcing strong sales and bullish forecasts, the stock was still down 28 per cent this year. While shrewd investors with a knowledge of the industry may discover the odd rough diamond, the technology sector no longer offers the easy killings of the dotcom boom.
On the plus side, investors capable of identifying those companies that are best placed to take advantage of new technologies will be assured of a good return in the mid-to-long term. "Innovation is still the key, both from new start-ups and even from the behemoths of the IT industry," says Mr Davis. "And IBM, Microsoft and others file a lot of patents every year alongside acquiring those start ups."
pf@thenational.ae