The last dot com bubble burst in 2000, leaving behind a trail of failed companies and investors with dreams as broke as their wallets. Only 12 years ago but already seemingly forgotten in the recent race to splash the cash.
It’s worth considering some key factors why the last tech bubble arose in the first place:
1. Widely available venture capital – Certainly there appear to be more gains to be made now from tech startups than from the depressed traditional stock market.
E.g. iOS (and now Android app) Instagram received $7m in venture funding last year (valuing it at $20m) and $50m more funding this year (valuing it at $500m) – just a week before Facebook bought the lot for $1bn.
Those recent investors doubled their money in a week – that’s a barrel of chum thrown into the mobile app market, guaranteed to attract a venture capital funding frenzy.
2. Investors overlook traditional metrics – ‘Boring’ metrics like Price To Earnings ratio are ignored – user uptake and technological advance appear far more sexy.
Consider some recent acquisitions and future IPOs:
- Dropbox valued at $4bn to $10bn. Whilst Dropbox is a popular cloud service (for good reasons), it remains to be seen whether its valuation stands up in the face of increased competition from much larger competitors.
- As mentioned above, Facebook bought Instagram for $1bn despite the app having no revenue and very few staff. It may have removed a potential prize from the grasp of Google+ but the deal prioritizes users over earnings.
- Facebook bought ‘friendly stalking’ app Glancee for an undisclosed sum – and promptly shut it down. Effectively they bought the technology and staff – the app itself only had 30,000 users.
- Rovio (creator of Angry Birds) valued at up to $9bn – surely based more on 200m monthly users than headline figures of $67m profit.
- The grand-daddy of them all: Facebook IPO values the company at up to $100bn despite the troubling fact that last quarter profits decreased to $205m and revenues per user are also dropping.
The P/E ratio for Facebook is close to 100 which seems obscenely over valued – by comparison, round figure P/E ratios for other notable tech companies are:
Microsoft – P/E 11 based on $256bn market capitalization
Apple – P/E 14 based on $533bn mkt cap
Google – P/E 19 based on $199bn mkt cap
3. The dot-com model was inherently flawed – A vast number of companies all had the same business plan – monopolizing their respective sectors through network effects.
Sounds very familiar.
Too Big Or Too Popular To Fail? – Dropbox and Twitter (each valued at up to $10bn), Facebook (up to $100bn) and other relatively recent startups may not be too big or too popular to fail when compared to rivals once held in high esteem:
Myspace – bought for $580m in 2005, sold for $35m in 2011. Myspace was the most visited social networking site in the world from 2005 to 2008.
Yahoo – turned down Microsoft’s buyout offer of $44bn in 2008, worth just $18bn today.
Bebo – bought for $850m in 2008, sold for less than $10m (reported) in 2010.
Conclusion
I don’t believe we’ve hit the peak yet as the continuing lack of growth in traditional markets should keep the new tech economy blowing hard for another year or two.
However, the signs of a new bubble certainly appear to be there. What do you think? Let us know in the comments.
I would not be surprised if Facebook goes the way of MySpace within 2 or 3 years. Its absurd that a company that has almost no assets, and an almost identical business plan of MySpace is going to be selling for about 100 times earnings. That assumes its earnings can even be sustained. Dont forget Netflix, trading for $300 a share in July 2011, now trading for $73. Based on current EPS of $2.98, that equates to a PE of about 100, same as FB is valued at. But it didnt last. NFLX now trades at a more reasonable PE of 24, since the stock plummeted. Theres a reason you dont see too many stocks trading at 100 PE. Because they arent usually trading there too long before they plummet to more reasonable levels.
I didn’t want to appear to be a Facebook basher but I agree with your timescales, at least the potential for a marked correction is there.
So many of the people I visit use Facebook just for the games (not social media) that once Zynga etc branch out to other platforms (after seeing the success of Rovio) there will be no compelling reason for them to log into Facebook – browser games (especially Chrome) and mobile apps appear to be the way forward
Hadn’t noticed Netflix but you’re right – 75% drop in less than a year, ouch. The current value seems more reasonable (maybe still a bit more to go) considering their expansion into new markets e.g. UK (although there is huge competition there from Amazon’s Lovefilm – Netflix didn’t compare too well at launch but are rapidly gaining market partners)