Tech bubble inflates amid small cap surge and pre-Christmas IPO rush

The small cap surge that was kicked off by commodities could be turning into a tech bubble.

Dean Fergie from Cyan Asset Management says some of the valuations in the tech sector are starting to look too high.

“The valuations to us don’t make any sense,” he told Stockhead. “There’s definitely a tech bubble for sure.”

He pointed to Updater (ASX:UPD), LiveHire (ASX:LVH) and GetSwift (ASX:GSW) as examples of stocks with very high market caps backed up by little or no revenue.

Updater, for example has a market cap of $630 million but half year revenue of $500,000.

Mr Fergie says Updater should be delivering profits of $35 million to justify that kind of market cap.

“My perception is that there seems to be a fair bit of money chasing tech and high growth,” he said.

“Certainly there’s some very aggressive stock-specific risk in the market, but whether the market has a massive pull back? I think that’s unlikely.”

He says rising interest rates might give sharemarket investors cause to look a bit harder at valuations.

Selling the small caps

The Small Ordinaries index is up 7.71 per cent in the last three months, compared to the All Ordinaries which is up 1.2 per cent.

As Stockhead reported in September, two of the big drivers behind the rally are a return of enthusiasm for commodity prices and investors’ desire to see some real growth, since shares at the top end of the market have stagnated.

Companies may be capitalising on the hype by bringing Initial Public Offerings forward and raising more money from the market than originally planned, says RM Corporate Finance’s Nathan Barbarich.

“There’s definitely heat in the small cap market and there’s no question this will bring forward discussions and bring potential deals out of the woodwork,” he told Stockhead.

At this time of year there’s another driver too: Christmas.

“Things tend to stop after December 10 and don’t pick up again until after Australia Day.”

There are 20 companies on the ASX’s IPO list with speculative dates coming up before Christmas.

There are another 13 which have announced plans to list but do not have a timeline.

Since September, 22 companies have listed — six of those in October alone.