NZ Herald business editor at large

Liam Dann: Do we have a tech bubble?

Xero chief executive and founder Rod Drury has blazed a trail for software companies. Photo / Mark Mitchell
Xero chief executive and founder Rod Drury has blazed a trail for software companies. Photo / Mark Mitchell

Does New Zealand have a tech bubble? It's not an unreasonable question. High-flying tech stock Xero has risen in value by 436 per cent in the past 12 months and is worth nearly $4 billion on revenue of only $30 million for the first six months of this year. Listed biotech company Pacific Edge has soared 210 per cent in the past year and has market capitalisation of nearly $350 million but reported revenue of less than $1 million last year.

Last week another tech hopeful, GeoOp, listed on the NZAX. The initial public offer valued GeoOp shares at $1 each. By Friday they were already trading at $2.50.

Off market we also have a bunch of tech companies that are doing very well raising private capital for expansion right now. Our tech sector is hot.

Perhaps we need to pinch ourselves and remember that the hot bit isn't actually making money.

The top five technology stocks in the country by revenue are a pretty unsexy bunch. However, Fisher & Paykel Appliances, Datacom Group, Fisher & Paykel Healthcare, Tait Radio, and Gallagher Group pulled in combined revenue of nearly $3 billion.

But the hot stocks are where the growth is. Last month's TIN100 report noted that the software development sector saw revenue growth of 20 per cent versus growth of just 3.7 per cent across the industry as a whole.

New Zealand software companies, thanks in a large part to the trail blazed by Xero, have certainly caught the attention of US investors and that is helping drive the boom.

Let's call it a boom. The trouble with calling it a bubble is that it implies the companies themselves are full of hot air. And that's not fair.

The bubble, if there is one, is on the market. It is driven by too many investors getting carried away, not just about the prospects of the companies but about the chance of making quick gains on soaring stock prices.

By and large, what happens on the market isn't something the companies can control.

Genesis Research and Development is an example of a good New Zealand tech company, with good people involved, that just didn't work out. It got caught up in the tech bubble of 2000 and was briefly one of the hottest stocks on the NZX. It had shares that peaked at $8.48 in 2000. Last year the company ground to a halt with shares trading at 1.8c.

Genesis was a biotech company that had some promising science around the treatment of psoriasis. It had other technologies, too, but this was the one identified as the real commercial prospect.

When it listed, Genesis was entering the US Food and Drug Administration Phase II clinical trials for PVAC, a potential cure for the skin disease.

Unfortunately, the Phase II trial turned out to be make or break for Genesis. And the result was break. Despite a lot of effort to salvage some value from the remaining science it never recovered from the trial failure.

Xero is no Genesis Research. It has a product and customers, for starters. It is the quality of that product that has ignited the initial interest, and well done to those Kiwis who have been rewarded for backing it from the start.

But budding tech investors need to really understand what they are investing in and what the risks are. They also need to understand that the US investors driving local prices are often sophisticated investment funds with portfolios full of tech darlings from around the world. They can afford to see one or two go bust - in fact they expect that some will go bust and factor that in.

The cause for concern is that we will see New Zealand investors caught up and inadvertently perpetuating hype that they aren't really geared to cope with.

In the US right now there are conditions that aren't too dissimilar to the conditions during the tech bubble of 1999 and 2000.

The economy is emerging from a downturn and monetary policy settings are stimulatory - interest rates are low and borrowing is cheap.

But as conditions improve, investors start looking for good returns and need something to do with their money. If the bank is only offering 2 or 3 per cent interest then many will look to more aggressive growth funds, including tech-focused funds.

We're seeing high-profile players like Facebook and Twitter list on Wall St. While these businesses are more mature than some of the contenders at the turn of the millennium, they still have a way to go to justify their market value.

It is extremely cool that New Zealand's tech sector is on the radar as US investors get back into growth mode. The capital investment heading our way is good news for local companies and it is creating jobs.

But it has a side-effect of making things go a bit crazy on the market. We just need to keep it all in perspective and hold on tight for the ride, because there is every chance this boom is just getting started.

On Twitter: @liamdann

- NZ Herald

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NZ Herald business editor at large

Liam Dann is business editor at large at the New Zealand Herald. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy. He hosts The Economy Hub video show every Thursday.

Read more by Liam Dann

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