Dead cert or dead duck, who can tell?

City Briefing

With only a few stragglers left to produce their half-term report cards, it's becoming clearer which companies are the winners...

City Briefing

With only a few stragglers left to produce their half-term report cards, it's becoming clearer which companies are the winners and losers in the IT sector. Looking at share prices clouds the picture, so let's look at revenue growth instead to draw some conclusions about the industry.

Unsurprisingly, the fastest growing revenues are to be found in companies that enable e-commerce, particularly in terms of Internet infrastructure and access.

Telecoms-related revenues, from companies such as CMG and Logica, are growing at more than 100%, Affinity Internet (telecoms, broadcasting and Internet convergence) reported turnover up fivefold, SurfControl (Internet access control) revenues up 117%, Baltimore (Internet security) up 213%, Magic Moments (Web hosting) up 270%. The list goes on.

Elsewhere, the semi-conductor sector is still hot, with manufacturers such as CML and designers like Imagination Technologies posting triple-digit revenue growth.

In the services sector, the Internet is also making itself felt with Parity reporting that its e-business revenue has risen 520%, and now accounts for a quarter of its solutions business turnover. E-business will increasingly form a larger part of services companies' revenues as all businesses re-engineer themselves.

After the hype, work is underway to ensure that the Internet makes a real difference to businesses of all sizes in the UK and, although we are still at the very early stages of its development, significant revenues are being earned.

Despite this, one area of Internet business remains disappointing: "wine bar" business models dreamt up to take advantage of trading over the Web. We've seen the failures at e-tailers and, and loss of enthusiasm for others such as The latest to disappoint is online financial services business, where losses widened on turnover that was up only 26%.

Despite the justified cooling of enthusiasm towards e-tailing and content businesses, there are still a large number of companies whose business model will stand up and earn decent profits. However, it is still too early to identify them and investors have moved from backing every new company, in the expectation of finding some winners, to backing none of them, to avoid picking the losers.

The lesson is that despite the Y2K lockdown and the general fall in stock market valuations in the second quarter, there are a number of technology sectors where companies are displaying strong growth.

However, simply delivering high levels of growth doesn't necessarily result in an improvement in share price, as that can depend on a number of other factors - just ask online automotive specialist Sema, where reasonable growth resulted in a 17% fall in its share price. Analysts were suspicious about the treatment of non-operating items and the share price was marked down as a result.

It's fair to say that people working in IT have a head-start on other investors if they are in a position to see how well companies and technologies are performing, both in terms of sales and the quality of the technology. In isolation, however, this is not enough to form an investment view.

There are numerous situations where the best technology failed to win the business and vice versa - just look at Betamax and Microsoft, for example.

Investing without a detailed knowledge of the market's perception of a company and how it is managed is a hit-and-miss affair at best and those tempted to do so should remember the maxim that the best way to make a small fortune is to start with a large one.

Ian Mitchell is an IT analyst with stockbroker Beeson Gregory. His opinions should not be construed as investment advice.

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