Dot Bomb 2.0?

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 $80-billion, is the most obvious example, but there are dozens of others.

Groupon is another standout—it refused a $6-billion offer from Google last year. Good thing too, since it is now allegedly worth $25-billion. Twitter may not be quite the flavour of the hour anymore, but it’s still worth $7,7-billion 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 $1-trillion 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 ecommerce 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 were right to refuse Google’s offer, and that Facebook might very well be worth $50-billion. 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 $15-billion more than Disney, and $9-billion 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 $8,5-billion. Not a bad payout for a company worth $1,9-billion 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.

Alistair Fairweather

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