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Ian Mitchell

City Briefing

The IT illiterate and those who have missed the boat are growing more vocal about the prospect of a...



Ian Mitchell

City Briefing

The IT illiterate and those who have missed the boat are growing more vocal about the prospect of a correction in technology share prices. Their argument seems to be that valuations have risen so far so quickly that they must come back and that when they do there will be a dramatic fall in prices.

This argument is flawed if you understand that technology, and particularly Internet-related technologies, are changing businesses profoundly. Investment managers controlling billions of pounds of funds are cashing in their holdings in "old economy" companies and investing in the technology businesses of the future. This change in investment policy is played for the long term and will not be derailed by a few minor falls in the Nasdaq or Techmark.

That said, there are risks in this brave new world and last week a warning shot was fired across the bows of the run-away Nasdaq and Techmark indices. The denial of service attacks on Yahoo!, E*Trade, eBay, Amazon and ZDNet caused jitters among investors worried about possible damage to the credibility of the victims' sites. The Nasdaq closed down 1.5% on Wednesday at 4,363, but has since risen to new highs as investors steeled their nerves.

While there was little these companies could do to protect themselves against a denial of service attack, security is a major issue for dotcoms and one that is all too easily overlooked in the buzz surrounding the business plan.

Companies need to build security into their e-commerce strategies from day one and take advice on a sound strategy for doing so, rather than simply installing security products. While this approach is bread and butter to IT managers, it does not seem to have filtered through to some dotcoms. In future, the markets are likely to be less forgiving towards Internet companies if they are victims of hacks they could have prevented. This time, investors simply saw the attacks as a reason to buy companies which provide Internet security, even though the companies that benefited do not provide products which could have prevented these attack. Baltimore Technologies, for example, continued its meteoric rise.

For now, the biggest worry for investors is not that the market will pull the plug on the technology sector. In most cases there are sound, if optimistic, reasons to support current valuations, many of which are based on news flow such as joint ventures or the formation of new divisions. Bigger worries for companies and their investors are business model-threatening events such as the loss of business partners or, indeed, major security problems.

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

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