Investors in technology stocks had a horrendous 2008, with some companies subjected to unprecedented share price falls. This can be seen in the bombed out valuations on offer, with software companies now trading at an average price multiple of about eight times earnings, according to broker Panmure Gordon. The sector's leading lights - Autonomy, Fidessa, Micro Focus, and Aveva - are rated at an equally modest 13.6 times earnings.
Panmure's technology analyst George O'Connor now warns that, after a year of hefty share price falls, 2009 will be characterised by earnings "casualties". This has already been demonstrated through the deratings in Aveva and Fidessa, largely due to earnings concerns in both companies' end markets. So the once highly coveted attributes of a "strong" order book and recurring revenues are now not as comforting, with companies slashing IT budgets, deferring and delaying contracts and increasingly going into receivership.
So, this year the investment spotlight is likely to increasingly fall on companies' free cash-flow yields, interest cover and gearing and savings made by cost cutting.