If you go to Google News and enter a search for ‘tech bubble,’ you’ll obtain a dozen fresh articles debating this question: Are technology stocks, particularly social media companies, overvalued?
The mother of all tech bubbles occurred in the late 1990s and early 2000s, when half-baked business ventures got armloads of cash just for fixing a .com to their name.
When the market regained its senses, in 2000, the bubble burst and buyers wound up with dot nothing. The question du jour: Does today’s market possess any of the attributes of the dot-com-era market?
The answer: Yes and no.
In the yes column, you have businesses with huge stock prices without much in the way of, say, profits. Think about some recent and awaited IPOs: LinkedIn.com, Pandora.com, and Groupon.com. Two of these have yet to turn a profit. (LinkedIn logged its first profitable year in 2010.) Twitter is expected to fetch a huge share price when it goes public this year, but the company has yet to iron out its moneymaking strategy. (Minor detail, right?)
The no column, there’s a huge quantitative and qualitative difference between 1999 and 2011. As Mashable columnist Jolie O’Dell notes, in 1999 308 tech companies filed for IPO. So far, there have been 25 in 2011. What’s more, it’s easier to see the worth of an Internet company today, when nearly 80 percent of adults and above 90 percent of teenagers are online. In the late 1990s, lower than 40 percent of adults used the Internet, according research from the Pew Internet and American Life Project.
In other words, the market has matured significantly in the last decade or so. And the players are more mature too. LinkedIn is no Webvan.
Regardless of the differences between 2011 and 1999, there’s still cause for concern. Stock market bubbles are like extremophiles — they find a way to grow in even the most hostile environments. (Which is why you see such huge stock values in an otherwise dismal economy.)
If we’re heading for market correction, I suspect it won’t be as severe as the one in 2000. But if Facebook starts running Superbowl ads featuring sockpuppet, it’s time to panic.