Tech shares end summer doldrums

But the surge won't last, analysts say

Are UK Internet shares finally making a comeback? Not likely, say industry observers.

Shares in technology around Europe picked themselves off the floor Thursday as investors returned from the summer holidays, with trading volumes hitting their highest levels since spring and the techMARK 100 at its best level in five months, up 162.5 to 4,119.75p.

Freeserve (quote: FRE) was one of the biggest tech gainers, rising 13p or 13 percent to 270p. Telecoms gained too, with Telewest (quote: TWT) up 23 to 172p, Colt Telecom (quote: CTM) up 359 to 2,320p and Energis (quote: EGS) up 66 to 629p.

E-commerce firms benefited from a report by McKinsey & Company which found business-to-consumer sites can indeed make profits. Auction site QXL.com (quote: QXL) was up 8.75p, or 17.2 percent, to close at 59.75p.

European ISPs outside the UK also got in on the action. T-Online was up seven percent after reporting almost doubled first half sales of 353m euros, while Spain's Terra rose close to eight percent and France's Wanadoo surged nine percent.

But industry analysts were sceptical about the surge, saying that despite the troughs high-tech stocks have fallen into over the last few months, most still have further to fall. "ISPs and portals are clearly overvalued," said Internet analyst Jamie Wood at JP Morgan.

Analysts said the buoyant mood was underpinned by T-Online's results and last week's news that Spain's Telefonica would underwrite a 2.2bn euro capital increase to fund expansion of Terra Lycos, the US-based portal. However, the rise was making Internet stocks even more pricey and there was little justification for that, several industry players said.

Despite the sell-off in the Internet sector since March, European ISPs are still trading at a median of around 4,700 euros per subscriber. This means that investors are prepared to value each ISP subscriber at close to 5,000 euros, which is thousands of euros more than they are prepared to pay for the average mobile telephone, satellite or cable subscribers which cost between 1,840 and 3,275 euros.

Even compared with the big US portals such as Yahoo!, European Internet users are twice as expensive.

Internet analyst Shobhit Kakkar at Forrester research points out that Internet service providers argue that they have many sources of potential revenues, including e-commerce and new media.

This view is not shared by outside investors and analysts. They stress the costs and the risks that come with multimedia, mobile Internet and broadband. These risks should be factored in, leading to lower prices.

In fact, a reasonable valuation for every mature user should be around 1,000 euros, not 3,000 or 4,000 euros, JP Morgan's Wood said.

The reason that share prices have not collapsed further is that most investors are holding on to their investments in the hope they will rebound later in the year, he said.

Prices have clearly found support at a level which was too high, acknowledged Marcus Bicknell, European president of US Internet investment group CMGI which is interested in buying Internet service providers to strengthen its AltaVista search engine.

"There is still a big gap between what the buyers want to pay and what owners think their companies are worth," he said.

As long as prices would not come down further, consolidation in the Internet sector was not going to take off, Bicknell added.

Yet consolidation was necessary as Internet companies across Europe were running out of puff due to a lack of cash.

Around the world Internet companies were tightening their belts, laying off thousands of workers as their financial backers were reluctant to funnel fresh money into the troubled sector that has just began to rebound from its dramatic fall this spring.

Between March and 21 August, 134 dot-coms around the world have handed pink slips to at least 11,648 employees, according to the Layoff Tracker of trade publication The Industry Standard. Around two thousand lost their jobs in August alone.

On Tuesday, European group buying Web site Letsbuyit.com said it would lay off 80 employees, 20 percent of its workforce, to reduce annual spending by 15m euros.

Letsbuyit is regarded as one of the lucky ones, as it tapped the stockmarket last month, raising cash to last it for another nine months. It floated on Germany's Neuer Markt with a valuation of 310m euros, half of what it had aimed for two weeks earlier.

Most smaller Internet companies that have missed the opportunity to float this spring are running out of cash fast, while their owners sit still and hope for a rebound of the market.

Reuters contributed to this report.

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