Dot bomb 2.0? - TechCentral

Dot bomb 2.0?

[By Alistair Fairweather]

When does a market go from being a “growth sector” to a bubble? As with falling in love, it’s hard to put an exact date on the event. And, just like a love affair, a bubble is marked by growing excitement, lavish spending on the object of one’s affections and an increasing inability to grasp reality.

Looking at the trend in valuations of Web and technology companies, particularly those based in Silicon Valley, there’s plenty of evidence of irrational ardour. Facebook, now “valued” at over US$80bn, is the most obvious example, but there are dozens of others.

Groupon is another standout — it refused a $6bn offer from Google last year. Good thing too, since it is now allegedly worth $25bn. Twitter may not be quite the flavour of the hour anymore, but it’s still worth $7,7bn at the last count.

It’s not just established companies that are rolling in imaginary money. Many new tech firms are reportedly beating away eager venture capitalists with a stick. “Honestly, we weren’t thinking of raising money, but now it’s kind of landed on our lap, we may be open to it,” said Clara Shih, chief executive officer of Hearsay, in an interview with Reuters.

And note, that’s for a given value of “established”. Twitter is barely five years old and Groupon less than three years old. That said, as with the dot-com bubble, this exuberance is spilling over on to older companies. When you hear that Apple will be the first company in history to be worth not just $1bn but $2 trillion, you have to question whether these are really analysts or horny teenage boys.

The really striking thing is that all of these valuations, bar Apple’s, are based on private share trades and funding deals. No one really knows how much money Facebook or Groupon makes. We know how much they claim to make but, unlike publicly listed companies, they’re not obliged to submit to independent audits to prove those numbers or to show us the gritty details of their costs and revenues.

Another sure sign of an impending bubble are the cries of “it’s different this time”. As usual, the excuses sound logical and convincing. These new companies have actual revenue, unlike the dot-com bombs. The venture capital spending isn’t all concentrated in Silicon Valley, three quarters of it has gone to startups outside the US. The Web and e-commerce have matured and gone global. And so on, and so on.

I’ll admit I have been swept along by the grand romance of it all. Last year I argued that Groupon was right to refuse Google’s offer, and that Facebook might very well be worth $50bn. But the last five months have seen both those companies nearly double in nominal value. At the SXSW tech conference in March 2011, self-made billionaire Barry Diller called these valuations “mathematically insane”. Every valuation announcement since then has proved his point.

To put things into perspective, let’s look at other companies of a similar “value” to Facebook and Groupon. Is Facebook really worth as much as Unilever, Inbev (the world’s largest brewer) or Royal Bank of Canada? Is it worth $15bn more than Disney, and $9bn more than McDonalds? And is Groupon really worth as much as Hyundai or Heineken?

If we need any more evidence of a bubble, how about the fact that Microsoft just bought Skype for a modest $8,5bn. Not a bad payout for a company worth $1,9bn just two years ago, not to mention one that currently runs at a loss (and has done so for years). Microsoft is calling it a strategic investment, much like its “strategic” deal with Nokia. Yeah, good luck with that one guys.

But this bubble — if that’s what it is — has roots far deeper and more serious than a bunch of overconfident geeks with good ideas. Governments around the developed world have pumped hundreds of billions of dollars into the markets at rock bottom rates and that money has to go somewhere. Property is still a bust and most established companies are still recovering but investors still want high returns, so high-tech looks increasingly tempting, despite the obvious risks.

Although the dot-com bust at the turn of the century seems like a tiddler by comparison to the Great Recession we are still struggling to escape, it had real and lasting consequences. Millions of people lost their jobs, and many people lost their savings. With much of the globe’s growth still on shaky ground, the last thing we need is another bubble. Unfortunately, as any young lover will tell you, the heart wants what it wants.

4 Comments

  1. no doubt about it. it will pop. its just a matter of when.

    one thing that is glaringly obvious is that users are now considered an asset, somehow implying that having an email address and a few photos on a database has some inherent value.

    Thus, Heineken, Disney and MacDonalds will still be here in 50 years. Facebook will not.

  2. @kidblack, you are 100% correct. It is bound to happen and I think it will happen sooner than later. Facebook, Twitter, Groupon and even Google are all over valued. If you do a survey on a million Facebook users I think 90% won’t mind closing their account if Facebook would want to start charging a fee. The Facebook employees trying to sell their shares privately before listing is also a clear indicator that they think it is too good to be true. It’s like a Ponzy scheme 🙂

    It could take a year, or 3 or even 5 years, but is is going to happen. Go short on tech shares.

  3. Cool article Alistair but I think its hard to argue against Facebook’s valuation when they expect $4 billion in revenues in 2011 and did $355 million in profits in the first 9 months of 2010.

    There is a great article on Forbes about why we are not in a bubble with some rationally argued reasons

    http://blogs.forbes.com/ericjackson/2011/04/25/will-you-shut-up-about-this-being-another-internet-bubble-already/

    The problem with all the “we are in a bubble” statements at the moment s that they appeal to fear or cynicism rather than reason to justify their conclusions. I’d like to hear some better reasons than “the valuation of some companies is too high”, especially when there is seldom any actual information about what makes these valuations too high.

    Thats just my humble opinion but I wanted to put it out there before everyone on this comment stream jumps on the bandwagon.

  4. @Vincent agreed. We shouldn’t confuse value with security. It you want security hide your money in your mattress. I think that you acknowledge this by your comment that ‘the money has to go somewhere’ and it goes where the value is.

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