May 7, 2012

A summary: Do we have a new tech bubble or not?

 Yes! We do have a tech bubble

  • The online game company Zynga used to be valued at $15-20 billion - as much as the combined value of the world's two biggest video-game makers Electronic Arts and Activision Blizzard - while having a weak business model.
  • 60 percent of the Internet companies that have gone public since 2010 are trading below offer price and buyers of the shares at their opening trade in the public market have lost an average of 32 percent. This could also be a sign that we don't have a tech bubble depending on your view of it.
  • Facebook has about 1 billion users and is valued at $100 billion - one user is worth $100. This doesn't have to mean that a smaller company with less users can value their company at $100 per user.
  • Smaller companies are getting investments from investors because they are desperately trying to find the next Facebook. The investors also have too much money so they don't know what else to do with it, except investing it in companies with business models they don't really like.
  • Investors have begun to prefer companies making no money - because it is easier to sell them to someone else at higher values - compared with companies making some money. It is easier to sell a vision if the company doesn't make any money at all.
  • Free is a dangerous business model. A company has to make cash. Many companies have plenty of users - but almost no earnings - and their goal is to sell some kind of user-behavior-information to other companies. For example, Pandora have 100 million users, but no earnings and the plan is to sell information about those users to other companies. But no-one knows how much money that type of information is worth - could it be zero?
  • Quotes like: "P/E ratio is a flawed metric to use when talking about what some of these new startups are worth." have started to appear. Isn't that exactly what everyone said during the last tech bubble? "This time is different - we don't need those silly accounting metrics anymore"
  • The Swedish newspaper SvD has created a special blog with the name "Silicon Valley" covering only tech companies

No! We don't have a tech bubble

  • Zynga and its games are actually becoming consumer brands, and there is a lot of recognition for growth potential.
  • Large tech companies are not over-valued: 
    • Apple (14 P/E) 
    • Google (18 P/E)
    • eBay (16 P/E)
    • Yahoo (17 P/E)
  • Facebook bought Instagram for $1 billion - but Instagram was also Facebook's largest competitor
  • While it is easy for smaller companies to find investments, it is harder for larger companies.
  • Media are reporting about the "tech bubble 2.0" because they didn't report about the latest tech bubble until after it had exploded.
  • The tech bubble 1.0 was more about spend your money fast, hire people as fast as possible, go public - and run! Today, many companies have a high valuation, but they hire more engineers to create a great product and are spending less money on stupid things such as champagne for breakfast.
  • People from outside of Wall Street are still remembering the last Tech Bubble and are afraid to do the same mistakes again.
  • In an online survey at the Wall Street Journal, 66 percent thought that we are in a new tech bubble. But, if there is a general consensus view that an asset is in a bubble, then it can't be a bubble. A bubble almost always happens quietly while everyone is a believer of that "this time is different".

Updated: 2012-05-15