Technology turmoil begins to turn

There are signs that life is returning to technology share prices. The Nasdaq Index has been flirting with the psychologically important 4,000...

There are signs that life is returning to technology share prices. The Nasdaq Index has been flirting with the psychologically important 4,000 barrier, venture capitalists have been investing at record levels and - most importantly - results from IT companies continue to meet or exceed expectations.

All of this augurs well for valuations, although it is unlikely that many of the dotcom companies will see a return to their previous highs until they become profitable and deliver on their business models.

Despite the turmoil in technology shares across the globe in the second quarter of this year, figures from the US show that venture capitalists have held their nerve and continue to back the companies that will provide tomorrow's technology.

PricewaterhouseCooper's Money Tree survey projects a doubling of venture capital funding in the US to $70bn in 2000, following a record $19.6bn invested in the second quarter of this year.

The most popular categories for investment were Internet-related service companies, such as content developers and order fulfilment companies. Internet infrastructure also did well, especially in Web site security, traffic management solutions and ISPs.

Significantly, Internet content and both B2B and B2C sites experienced decreases in funding, giving some comfort that the more esoteric business models are being weeded out.

The fact that venture capitalists are continuing to back technology companies is good news for investors in shares already listed on stock exchanges.

The latest round of results has reinforced the fact that most technology companies meet or exceed the already demanding expectations of analysts (barring the Y2K-related fall-out in the UK).

Medical and retail systems provider Torex, for example, last week posted interim resultswhich showed turnover rising 88% and pre-tax profit up 69%.

The medical division, which steals most of the limelight, despite the equally impressive prospects in the retail sector, is benefiting from the Government's Information for Health strategy.

This strategy proposes spending in excess of £1.3bn over the next five years to improve patient administration (through electronic patient records and appointment systems, for example) and developing more clinically based systems to help medical staff.

In the US, IT is seen as a way to improve the efficiency of diagnosis as well as administration, but in the UK more has to be done to catch up.

Torex, with its leading position across GPs, hospital information systems and in community health, will play a leading role, so further growth in this area seems assured.

The resurgence in share prices generally will be tested by the scheduled flotation in October of Arc Cores, a semiconductor design company which is expected to be valued at £400m-£600m.

In this column some months ago, I described the powerful business model of Arc and its fellow silicon intellectual property competitors, and how the model enables UK companies to grow into global players without the intensive capital spend a manufacturing operation would normally require.

Arc is a quality player in the sector and when its shares are placed with institutions, the size of the premium on the first day of trading will be watched closely to determine how healthy the UK technology sector is.

Ian Mitchell is an IT analyst with stockbroker Beeson Gregory. His opinions should be construed as investment advice.

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