Tech boom 2.0?

The rise in popularity of tech stocks is gathering momentum, but will it all end in tears like it did more than a decade ago?

Following the successful debut of currency transfer firm OzForex (ASX: OFX) and the meteoric rise of freelancing website Freelancer (ASX: FLN), a number of smaller technology firms are looking at listing on the ASX. OzForex listed at a share price equivalent to 20 times earnings, but was heavily oversubscribed. Freelancer issued shares at just 50 cents, but saw its shares go as high as $2.60, before settling at around $1.50 currently.

We’ve also seen New Zealand cloud-based accounting firm Xero (ASX: XRO) double its share price in recent weeks and over the past six months has tripled in value, despite not making a profit.

Now Pepperstone Financial, an online currency trading broker is looking to go public, and is considering a listing on the ASX. In just three and a half years, Pepperstone has garnered 25,000 clients and is generating $29 million in profits from revenues of just $34 million, over the twelve months to June 2013. The company expects to double its revenue and earnings this financial year, which could see the company valued by the market at around $600 million, and potentially over $1 billion.

But it’s not just new companies coming to market that are hot. Several small tech firms already listed on the ASX have seen their share prices skyrocket. Mobile payments provider Mint Wireless (ASX: MNW) has seen its share price saw by 67% since the end of May 2013, while shares in Mobile Embrace (ASX: MBE), a company that provides mobile communications, payments, marketing and applications have risen 923% over the same period.

While some of these companies provide a disruptive presence to the existing players in their markets, we don’t expect the leaders in their markets to lie down without a fight.

Foolish takeaway

Investors should be cautious when approaching ‘sexy ‘, internet businesses to invest in. As always, it’s important to do your homework and make sure that the company has quality management, decent products, a strong balance sheet, growing earnings and the ability to generate sustainable profits.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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