The stock market meltdown in the technology sector that began during the second quarter of last year does not yet appear to have subsided.
It is true that some signs of stability have emerged as several leading technology companies, such as Intel, have begun to produce sales and profits that are in line with (reduced) market expectations. While this has created some degree of stability in the share prices of technology companies, there is no sign of a sustained rise in activity and it seems likely that even current expectations, with respect to sales and profits, will prove to be too optimistic. Therefore, the risks with respect to share prices remain firmly on the downside.
Investors remain extremely selective, although they are willing to invest fresh funds in those companies that are perceived to have good prospects. A case in point is Riverdeep, where #149 million worth of shares were recently placed in the market at a price of #4.97, which represented a modest discount to the prevailing quoted price.
Riverdeep provides educational material in the US, via the Internet and CD-Rom, for the full kindergarten range through to high-school students. Its products adopt interactive problem-solving techniques and provide support and professional development offerings for students, teachers and parents through a subscription-based Internet portal.
The company has shown consistent subscriber growth since its establishment and recently reported strong quarterly results that once again exceeded market expectations.
Riverdeep now expects that it will achieve cash break-even for the calendar year 2001, which is well in advance of its original target.
At the other end of the technology performance spectrum is the once high-flying Baltimore, whose shares continue to plunge on the stock market. The company recently announced plans to reduce its cost base by between £30 million sterling (#49 million) and £35 million by cutting 250 jobs. However, in recent months analysts have raised doubts about the eventual scale of demand for its products, suggesting that even more cost-cutting measures may be needed. Ominously, some doubts have been raised with forecasts that the company's still-significant cash pile will be exhausted before it achieves profitability.
Baltimore is the leading European provider of public key infrastructure (PKI) products. PKI effectively represents digital ID technology, which enables businesses to conduct secure communications and transactions over computer networks, intranets and the Internet. While the technology is proven, it apparently is quite complicated and costly to install, and, in the current tough environment, companies are cutting back on such expenditure.
The accompanying table shows the share price performance of Riverdeep and Baltimore, together with their key international peers. The discrepancy in the share price performance of these companies highlights just how important share selection in the technology sector is. Over the past three months Baltimore's shares have plummeted by 75 per cent compared with a rise of 59 per cent for Renaissance Learning. Also, it remains extremely difficult to form a judgment regarding the appropriate valuation to apply to these companies as most are still some way off making actual profits. Analysts, therefore, are still focusing on sales/revenue growth and the table sets out the current share price/sales ratio (PSR) for this selection of companies.
Baltimore and Entrust are now trading on a PSR of 3.4 and 2.5 respectively. In the context of the recent history with respect to technology companies these now seem reasonable. However, it should be borne in mind that "old economy" industrial companies will normally trade on a PSR of around 1.0. It is when we consider the enormous PSRs attributed to Riverdeep and Renaissance Learning that it becomes apparent that very high valuations are still the norm across the technology sector. Only time will tell whether such high ratings are eventually justified.
