Investors' appetites are famously fickle, and global technology stocks may be the latest victims of their changing tastes. Shares in three online companies that recently floated in London - takeaway ordering platform Just Eat (JE), domestic appliance seller AO World (OA) and fashion retailer Boohoo (BOO) - this week fell about 5 per cent, to below their launch prices.
That won't surprise more valuation-oriented investors. Just Eat's shares leapt 10 per cent on 3 Apr, its first day of trading, taking its enterprise value to 100 times last year's cash profits. They now trade at 250p - a step down from their 260p launch price. Along with the rest of the new wave of dot-com stocks, its claims of being disruptive have come under scrutiny, with some analysts pegging them as "tech-enabled" rather than true technology companies.
But the new stocks on the block weren't the only ones affected. Shares in established UK tech companies such as Arm, CSR and Pace also took a hit, in what appeared to be a worldwide correction in tech stocks. America was the first to falter, as its tech-heavy Nasdaq index fell 5 per cent in three days, its biggest decline since November 2011. Shares in Asian companies, such as Chinese media and e-commerce giant Tencent, also tumbled.
The slump may have been sparked by a positive monthly employment report in the US. That raised fears the government would reduce the bond buybacks it has used to stimulate the economy - so-called quantitative easing - and even raise interest rates, which could cause a slide in equity markets. Tech shareholders may have wanted to get out while they were ahead. They may also be wary of sky-high valuations ahead of what could be a lukewarm first-quarter earnings season in the US.
Inevitably, other investors saw the market slide as giving an attractive entry point into fast-growing, innovative global companies that are ringing in large profits. In general, however, it has prompted some to re-evaluate the justification for Just Eat and its peers' steep ratings.
Just Eat, which launched its first website in 2001, lets people in 13 countries browse their local takeaways, then takes a roughly 11 per cent cut of any orders made. It was the largest UK tech float in eight years, and the first company to list on the London Stock Exchange's High Growth segment. So far, 36,000 takeaway restaurants have signed up to be listed on its website, including 6,500 last year. That reflects interest from home diners: across Europe, total orders leapt 60 per cent to 40,200 in 2013, with the number of active Just Eat accounts rising by over 40 per cent to nearly 5,900.
Crucially, the company has also shown it can make money. It earned underlying cash profits of about £14m on revenues of £97m last year, a sharp rise from 2012. Cash-profit margins are high – over 40 per cent in Denmark, its most mature market, and 37 per cent in the UK. However, £80m of its sales stemmed from these two nations, so overdependence may be a concern.
Bulls also argue that Just Eat is well positioned to benefit from rising adoption of smartphones and tablets. More than half its UK orders in December were received through its mobile website and app. The £100m raised in its IPO is earmarked to support further expansion and acquisitions. The company is considering expanding its range to include collection-only restaurants as well as those that deliver.
