Is this a new bubble that floats? Or, is this a “same old, same old” bubble that explodes, and quite possibly at a time when the fragile and hardly recovering economy can least absorb it.
So, the question is not whether there will be a technology “bubble.” There is one. And, its inflation will accelerate given all the free money sloshing around in pursuit of investment nirvana. The only question is: will the bubble’s seemingly insane valuation, in fact, turn out to be accurately valued with long term sustainable growth, like railroads a century ago? Or, something like that.
I have to chuckle when I recall hearing on a TV talk show that when JP Morgan (JPM) CEO Jamie Dimon’s child asked him what a “financial crisis” is, and his response was: “….oh, something that happens about every ten years.” I guess some of those “brainiacs” in Silicon Valley could use the same line.
The Economist magazine had another funny observation. After the dotcom boom of the late 90’s turned into a bust in 2000, they observed bumper stickers in the Valley imploring: “Please God, just one more bubble.”
That Wish Has Been Granted
In fact, that “wish” was too passive. This is like some astronomical dream. Although Mark Zuckerberg may think he’s floating on a bubble somewhere in outer space, which he probably is, but, it’s possible he’s sitting on a hydrogen bomb. Not yet public, Facebook is being valued in secondary-market trading at about $76 billion, up from about $35 billion at the end of last year. That’s billion with a “b,” valued higher than Boeing (BA) or Ford (F). Twitter gets a mere $7.7 billion valuation. I guess this is nothing to “tweet” home about?
Or, consider Groupon Inc. who filed to go public. It has been speculated that the IPO could value the company at $20 billion. On the heels of 2010 revenues of about $713 million, and a loss of $413 million, and with Google (GOOG) and Facebook also looking to enter their space, is everybody smoking something or am I just blind to the Groupons and Facebooks and Twitters being the best last hope for U.S. economic supremacy in the future?
If this is to be true, I think I want out.
A little context here: Amazon (AMZN), the world’s largest Internet retailer is worth $90 billion today and was valued at just over $400 million when it went public in 1997. As William Quigley, Managing Director at Clearstone Venture Partners, quipped, “That skimpy valuation represented less than one times its forward 12 months of revenues, a multiple more closely associated with a corrugated cardboard manufacturer than the most important innovator in retailing in the past 100 years.”
Ebay (EBAY), currently valued at about $40 billion, went public in the 90’s at a $650 million valuation, and Cisco (CSCO), perhaps the most important company in computer networking infrastructure, worth about $92 billion, went public at $225 million.
On the other hand, in 2004, Google went public at a $40 billion market cap, and there were many investors at the time who believed it was overvalued. Hello! Try undervalued, having earned about $19 billion in gross profit in 2010 and $12 billion in operating profit.
I suppose this is the kind of result the current bubble nay-sayers are wishing for.
LinkedIn (LNKD) was the IPO pioneer of this new crop, going public at $45 a share, skyrocketing to $94 on the first day. This put a value on the company of $9 billion or 30 times sales of $243 million last year and a whopping 666 times earnings.
Bubbles, bubbles and more bubbles?
Indeed, there are several points of difference between “Tech Bubble I” and “Tech Bubble II,” which many investors and their hopeful entrepreneurs are using to convince themselves that this bubble will float.
First, “Tech Bubble I” was all about creating the infrastructure for the web. The big bucks were investing in business-focused firms from producers of networking gear to computer chips to online billing, and so forth, all of which require more capital and take much longer to launch than consumer sites. “Tech Bubble II” is about quickly-built and faster growing consumer sites like Facebook, Twitter, Groupon, social networking games, smartphone software, and consumer services in general.
According to research firm VentureSource, investment in consumer tech companies nearly tripled to $874 million from $310 million a year ago, while the rate of investment dollars for business firms slowed to $2.3 billion from $1.9 billion a year earlier. Between 2006 and 2010, the venture investment in business firms dropped 35%, from $18.4 billion to $11.9 billion, while the capital for consumer businesses soared almost 300% during the same period reaching $4.8 billion in 2010. Accordingly, there are fewer entrepreneurs pursuing ideas for business products.
Is this a good thing? Once again, it kind of says it all about our compulsively consumptive culture. From creating value, (like investing in the “heavy lifting” of this new industry and its infrastructure), to consuming value, will we simply turn this industry over to another country not unlike others we couldn’t compete in?
The second big difference between the two bubbles is the proliferation of access to the Internet. In 2000 only 30% of U.S. households were plugged in. Today, Internet access is close to 100%, and China is worth the context: they’ve gone from 20 million users in 2000 to nearly 500 million today. And, there are 2 billion users around the world. In an economic context, China was a $1.2 trillion economy in 2000, today, $5.7 trillion. In 2000, India was a $500 billion economy, today, $1.4 trillion, and Brazil was a $600 billion economy in 2000, today, $2 trillion.
The fact that the Internet is now mainstream and still expanding globally, provides some degree of confidence that there is sufficient bandwidth, so to speak, for outsized venture investing. The tech II bubble therefore, has greater odds for floating vs. popping.
Thirdly, Tech Bubble I started forming only after several start-ups went public and investors went crazy with wild-eyed expectations, pushing values into the stratosphere. This time around, the values are being pumped up in private, largely by “angel” investors who won big in the 90’s bubble, along with private equity firms and investment banks. This bubble also has a larger global interest due to the explosive expansion of all facets of the Internet.
So, while this bubble may be inflating on the bets of more sophisticated investors than my taxi driver in Bubble I, it does not mean they have any greater knowledge than he did.
Finally, William Quigley of Clearstone Venture Partners points to another difference this time around: the rise of the hedge funds. Since 2000, the number of funds has doubled and the assets they manage have nearly tripled to $2 trillion. His perspective is that hedge funds usually specialize in certain asset classes, like technology, and because of this focus, they are typically more knowledgeable regarding valuations.
Here We Go Again
The other major difference between the bubbles, and in my opinion the difference that is inflating this bubble bigger and faster, and therefore, will result in a more catastrophic explosion, is the humungous amount of capital that has not only been sitting dormant, on the “sidelines,” during this recession, but which has also been further expanded by easier and cheaper money (thanks to the Fed’s “QE” programs and interest rates at zero). And, since this capital can’t seem to find enough increasing consumer demand to invest in supply side growth, and since the stock market is approaching its all-time high (and currently in “slow gear” along with the commodities run-up), where is the investment opportunity?
That’s right. It’s pouring into Tech Bubble II.
And, even though Tech Bubble I popped, it was driven by real, and long-term sustainable value (just driven into “over-value” at the time). The laying of fiber optic cable, building the tech infrastructure, essentially building the Internet “highway,” was a big deal and paved the way for this next generation of e-and mobile-and social-commerce.
So, I go back to one of my opening questions: Is it “here we go again?” Or, is it “this time is different”? Is it “irrational exuberance”? Or, is it a brilliant investment strategy?
Is this a new bubble that floats? Or, is this a “same old, same old” bubble that explodes, and quite possibly at a time when the fragile and hardly recovering economy can least absorb it?
The Economist magazine’s bumper sticker observance following Tech Bubble I’s bust: “Please God, just one more bubble,” is followed by their suggestion for another sticker: “Thanks, God. Now give me the wisdom to sell before it’s too late.”
It is a bubble. And, it will burst. Just hope you have the wisdom to know when to sell.