The Economist: Frothy.com (A new tech bubble seems to be inflating…)

ATN-300InsightaaS: The Economist is one of the world’s most respected sources of insight into business and social issues, and often achieves the rare feat of connecting both perspectives into a single analysis. Today's featured post, which looks at whether a new tech bubble (like the infamous "dot bomb" debacle of 2000) delves deeply into the business side of this equation, but in doing so, explains that stress on the social score may not be as great as in the past.

Anyone who actually lived/worked through the crash of 2000 can't help but notice parallels, when we see the valuations attached to companies like Alibaba and Uber. But the Economist makes the point that while a bubble may be forming, its composition is different. It quotes a 2000 initiative from Barron's that found 51 listed tech companies that were in danger of running out of cash, and contrasted it with a December 2014 repeat that found only 5 firms in similar straits. Along the same lines, the article notes that the NASDAQ P/E is about 23 today, vs. more than 100 in 2000.

Where, then, is the froth coming from? The Economist points to two sources. One is corporate investments made by IT leaders: the piece observes that "Apple, Amazon, Facebook, Google and Twitter invested $66 billion in the past 12 months". The other is private market funding, which has buttressed the valuation of Uber and other tech firms; the article quotes VentureSource as saying that "are 48 American VC-backed firms worth $1 billion or more, compared with ten at the height of the dotcom bubble.".

The 'net net' here appears to be that while valuations are at bubble levels, there is less institutional exposure (via the stock market) to potential fallout caused by their collapse. As Sramana Mitra observed in a LinkedIn post on this Economist article, "the public market is NOT in a bubble, hence when this one bursts, not much harm will be caused, except a lot of rich people will lose a lot of money." 

IN DECEMBER 15 years ago the dotcom crash was a few weeks away. Veterans of that fiasco may notice some familiar warning signs this festive season. Bankers and lawyers are being priced out of office space in downtown San Francisco; all of the space in eight tower blocks being built has been taken by technology firms. In 2013 around a fifth of graduates from America’s leading MBA schools joined tech firms, almost double the share that struck Faustian pacts with investment banks. Janet Yellen, the head of the Federal Reserve, has warned that social-media firms are overvalued—and has been largely ignored, just as her predecessor Alan Greenspan was when he urged caution in 1999.

Good corporate governance is, once again, for wimps. Shares in Alibaba, a Chinese internet giant that listed in New York in September using a Byzantine legal structure, have risen by 58%. Executives at startups, such as Uber, a taxi-hailing service, exhibit a mighty hubris.

Yet judged by the financial yardsticks of the dotcom era there is as yet no bubble. The NASDAQ index of mainly technology stocks is valued at 23 times expected earnings versus over 100 times in 2000. That year Barron’s, an investment magazine, published an analysis showing that 51 listed technology firms would run out of cash within a year. On December 6th Barron’s repeated the exercise and found only five listed tech firms with wobbly finances.

Instead, today’s financial excess is hidden partly out of sight in two areas: inside big tech firms such as Amazon and Google, which are spending epic sums on warehouses, offices, people, machinery and buying other firms; and on the booming private markets where venture capital (VC) outfits and others trade stakes in young technology firms...

Read the entire article on The Economist's website: Link

 

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