Market view: the time for new tech has arrived

By Patrick Foot, financial markets writer at IG

 Will 2014 be remembered as the year that the technological status quo faltered? Now that we have had the final ‘earnings season’ – the traditional time when companies report on their financial figures for the past quarter – of the year, it is more possible to examine how companies might reflect on their year.

Certainly, it has been tougher so far than many were predicting. Those optimists who were hoping for a return to economic health, high interest rates and fluid business were disappointed, and in too many countries, recovery seems all too distant.

One major repercussion from all of this has been extra pressure on businesses the world over. Tech, it appears, has felt this pressure harder than most. Even those technologies that are still relatively fresh from a business perspective have suffered: social media, mobile and online streaming amongst them.

Calling social media a fresh technology may seem jarring – Facebook celebrated its 10th anniversary this year, after all – but the industry has not been long on the markets. Facebook joined the NASDAQ back in 2012, followed shortly after by LinkedIn, then by Twitter a year and a half later.

Despite the difference in time, there are plenty of parallels in the performances of Facebook and Twitter thus far: both have struggled for periods as investors doubted their ability to generate real profit, both then proved investors wrong.

Now, both have reported earnings that have been received poorly by the markets. Neither was actually particularly poor, but neither was deemed exciting enough for traders to pay attention. For high-growth, cutting edge companies, being perceived as dull is a real problem. Now we may be at a point where social media either becomes as established as other long-standing communications platforms, or becomes replaced.

2014 is also the seventh straight year that we have seen Apple release an iteration of the iPhone. Market response to Apple’s release was typically strong – the company’s marketing to consumers and investors is peerless –elsewhere, though, cracks are showing in the mobile sphere.

Samsung, for a long time now Apple’s biggest competitor for smartphone dominance, is worth around 10% less from the beginning of the year. Sony, another major player, is in a dogfight thanks to several years of stagnation. The long-standing state of smartphones has been that the top players release new models each year that are snapped up thanks to new technologies and capabilities. Now innovation has slowed, cheaper handsets are beginning to perform to a similar standard to expensive ones, and demand is sagging.

ARM might be the company that best demonstrates the problems faced by smartphones. The microprocessor manufacturer was recently able to boast that it powered 95% of smartphones and that its technology reaches 75% of the world’s population. ARM’s ability to  take advantage of the ubiquity of smartphones – much to the delight of tech-savvy, online shares traders – has been peerless.

That place at the forefront of the smartphone revolution has led ARM’s value to soar over the past few years. At the beginning of 2009, one ARM share cost £86; at the beginning of 2014 it was £1058. That means growth of almost £200 per year.

Now, ARM’s share price is around £875. It’s earnings call on October 21 caused it to drop briefly below £800 as investors questioned how growth would continue. And plenty of other high-growth businesses away from mobile are feeling the heat: Tesla’s meteoric growth has stalled, and the company is worth around 10% less now than two months ago. Netflix’s recent earnings call was little short of disastrous.

New technological companies tend to rely on ultra-fast growth in order to maintain momentum, until they either begin to challenge more traditional businesses or fade away. Across markets, fast growth companies are either maturing or facing the problems of slowing growth. The time has come, it seems, for a new phenomenon to start exciting users and investors once more.

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