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Are We in the Next Tech Bubble?

This article was written by in Investing. 22 comments.


Paul La Monica shares my concern that today’s market is reminiscent of the dot-com bubble of 1999. The bubble, if it exists, would be evident in higher than expected valuations for private companies like Facebook ($75 billion) and Groupon ($25 billion), not to mention Huffington Post’s recent sale to AOL for $315 million. In his article, Paul also refers to a few publicly-traded companies whose valuations are extraordinarily high compared to their earning estimates.

For companies whose shares are trading on private exchanges like SecondMarket, the hypothetical bubble may not affect most investors. I’d be concerned once Facebook, Zynga, and Twitter go public, though. These companies will probably go public at some point to take advantage of an influx of cash from a wider array of investors.

It just goes to show that some things really haven’t changed since 1999. The dot-com sector, like any other, has its winners and losers. Investors have to do their homework to find the former and steer clear of the latter.

It’s easy to judge Pets.com as an imminent failure after the fact, but it’s much more difficult to identify over-exuberance when it is happening. Doing homework and studying financial reports isn’t going to be enough when and if the bubble bursts. Right now, most investments seem historically high — tech stocks, oil, and gold, for example — while the only type of asset that seems to be laying low, at least when compared to values for the past several years, is real estate.

Just as it might be the best time to buy houses, particularly as an investment, it’s more difficult to get loans to do so on a leveraged basis. Buying low and selling high isn’t always as easy as it sounds with certain forces, putting aside investor behavioral psychology, work against you.

CNN Money

Published or updated March 31, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 22 comments… read them below or add one }

avatar Investor Junkie

Flexo, I agree 100%. It’s not as bad as in 1999, but it’s bad enough at this moment.

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avatar Kyle

The main difference is that companies like Facebook ARE actually earning a profit. In the late 90′s, even companies that were hemorrhaging money were receiving insane valuations. I still think $50 billion for facebook is ridiculous, though.

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avatar Investor Junkie

This is true, but the valuations today are still outrageously high. Back then they had no earnings ;-)

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avatar Jason

Generally I agree with you, but very few tech companies actually HAVE gone public. So unlike the tech bubble pop of 2000, it’s only “private” money that is funding these companies.

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avatar Ceecee ♦53 (Newbie)

I know that the one tech stock I follow is going nowhere. It is true, real estate is low, but the only way you can borrow money is if you are so solvent that you don’t really need to borrow. Not much seems to make sense lately…

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avatar Jonathan

I don’t know why people have gotten the impression that the banks aren’t lending. They may not be lending to unqualified buyers or with no money down any more, but that’s mostly just a reversion to the earlier standard.

I bought an investment property 6 months ago with a standard 20% down (no, we definitely could not have bought it outright) and had no trouble with financing whatsoever. The same major bank has pre-approved us for another, and has told us that as long as we can come up with down payments and meet their income requirements, they’ll fund as many as 10 of these. The greatest part is, our income will go up with each one we buy and rent out.

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avatar Rob Bennett

We’re always either in the process of inflating a bubble or in the process of recovering from the financial damage resulting from the bubble we inflated in earlier days.

This is no way to run a railroad.

I think we need to incorporate valuations into every investing analysis we do. Let people see how much ignoring valuations hurts their long-term interests and we won’t have any more bubbles.

The old rules are just not working anymore.

Rob

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avatar Echo

Much like in the late 1990′s, once the big players start the trend of going public, everyone will want a piece of the social media action. We may start to see ridiculously high valuations on companies you’ve never heard of because they will supposedly become the next Facebook or Twitter. Even the valuation given to Facebook at $50 billion seems crazy when they had approximately $1 billion in revenue in 2010.

The problem with social media as a business model is that the membership and user generated content is absolutely free. The only way to make money is to sell advertising and try to seamlessly integrate it into these online communities without turning off its users.

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avatar skylog ♦368 (Nickel)

i agree echo, it will be interesting to see how it plays out once the tap is opened up. i think you are right that once it starts, the demand may push valuations to insanely high values. this will be the true test…when the mania hits.

i also love your second point, it seems more and more advertising is the only game in town. that scares me. too many people going to for the same piece of the pie. too many people going after the same model.

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avatar bb

100 P/E when they go public. And not every social networking sites make money like Facebook.

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avatar nimrodel ♦42 (Newbie)

If there is a tech bubble going on now, it’s nothing like the one from ’99. The companies actually HAVE profits this time, and it’s only the really big ones going public anyway.

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avatar cubiclegeoff ♦896 (Dime)

True. You don’t see such a huge number of small start-ups like you did in the late 90s, early 2000s doing everything possible online without much backup or profit potential (or a decent business plan). The tech companies now, especially those considering going public or that already are, are in a different situation.

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avatar wylerassociate ♦162 (Cent)

i don’t think we’re in the next tech bubble yet but I want to see what happens a few yaers down the road when more tech companies/social media entities go public.

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avatar rewards ♦31 (Newbie)

From an investment standpoint, are there any ways to play the real estate market outside of REITs?

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avatar Investor Junkie

buy real estate?

Home builders, Home Depot, Lowes.

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avatar Jonathan

Find rental properties. It’s not as passive as financial markets or REITs, but there are many places you can buy properties with great cash flow and a tenant who will pay off your whole mortgage for you. And if property values go up, that’s icing on the cake.

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avatar jim

Its not nearly as crazy as the internet tech bubble.

Sure some companies are overvalued and will crash. But some are not going to crash. Lots of people wish they bought Google after it IPO’d and regret buying Pets.com

Facebook or Groupon might be a little overvalued. But maybe not…
Facebook is expected to have $1B profits this year so $75B market cap would be a P/E of 75. Thats high for sure. But their profit / revenue growth rates has been >100% for a few years. Google had a P/E of over 100 in 2006 and if you’d bought it then you’d be ahead now. Plus don’t forget they have like 600 million users… thats hard to call worthless. So Facebooks valuation doesn’t seem irrational really.

Companies like Travelzoo and Opentable are being bid up on the coattails of Groupon. Those are overvalued. TZOO is at a PE of 83 and OPEN is at 182 which is not warranted at all.

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avatar pfninja ♦256 (Nickel)

Twitter is the one that scares me the most of that bunch. With no true way of generating a solid recurring revenue stream (sponsored tweets can not sustain their business), you can only wonder how long they could sustain an extremely high P/E after IPO. Celebrities are generating revenue without paying a cent to Twitter (celebutant X tweets about a certain product – gets paid $10,000) – until Twitter can get a grasp on that stream there is no reason for them to go public.

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avatar cubiclegeoff ♦896 (Dime)

Agree. I don’t see how Twitter can really make money without becoming a place filled with spam and random advertising, or charging larger users, like news outlets, celebrities, etc. a fee.

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avatar lynn ♦155 (Cent)

Will we ever learn? I guess I know the answer to that one. But, I was hoping.

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avatar Jayge

Companies in the 90s tech bubble were trading at P/E ratios well over 100(I remember one case where the multiple was 181) and some literally had no business model or profit. People became so enamored with the seeming easy money of the internet castles in the air that they deluded themselves it was different this time, citing the “New Economy” and replacing old measures of valuation like revenue and assets with eyeballs and clicks. Like most bubbles it had started with actually very good and in their own way revolutionary companies, like Amazon and eBay, that were making huge profits through the 90s. But eventually came along companies that used the same buzz words(“e-” “.com”) but didn’t have the same fundamentals, like theglobe.com and boo.com. So the real risk here is that in a few years as these companies go public and their trading price sky rockets, several smaller companies with “Web 2.0″ and “social media” in their description, are given larger than warranted valuations and investment funds simply because venture capitalists are looking for “the next facebook” or “the next twitter”. If it’s a bubble now, we are at the very beginning.

Also, Facebook made about $2 billion dollars in 2010. Being valued at $50 billion dollars would give it a multiple of 25. For a company like Facebook, that’s not even remotely ridiculous. It’s of course possible that in some weird scenario Facebook spirals out of control and collapses, but I can’t help but remember the enormous amount of press criticizing Zuckerberg in 2006 when he didn’t sell Facebook to Yahoo! for a billion dollars. My estimate would be that the company will be worth more than double what it is now within the next few years, and the same goes for Twitter and to a lesser extent GroupOn and Zynga. Remember that Twitter and Facebook have focused on building fundamentals so much that they are basically resistant to revenues, which will change in the coming years.

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avatar Kathryn C

Did you see this article in Bloomberg BusinessWeek? Just read it and thought of this post. link

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