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Another tech bubble

Are we in the midst of a 1990s-style tech bubble? Some experts think so.

Try this: Check out Google News and key in a search for ‘tech bubble.’ You’ll obtain a wide range of results. Fresh results.

But let’s pause for second. What, exactly, is a tech bubble? Here’s Investopedia’s definition:

Tech Bubble – a pronounced and unsustainable market rise attributed to increased speculation in technology stocks. A tech bubble is highlighted by rapid share price growth and high valuations determined by standard metrics like price/earnings ratio or price/sales.”

Hmmm. Can we find proof of conjecture and inflated valuations?

Scanning the recent headlines, we have stories of acquisitions and IPOs (and impending IPOs) for a variety of hot domains, including LinkedIn.com, Pandora.com, Groupon.com, Zynga.com, and Twitter.com. And there are at least eleven billion reports and blog posts about Facebook’s eventual IPO.

If we’re in a tech bubble, it certainly has a social-media flavor!

So. Of these hot companies, how many are profitable? (This helps us gauge whether their valuations are inflated.)

  • LinkedIn – Earned $12 million in 2010 (its first year of profitability).
  • Pandora – Not profitable.
  • Groupon – Same story.
  • Twitter – A little!
  • Zynga – Way profitable! With a 35% profit margin in 2010.
  • Facebook – Quite profitable. With a respectable 25% profit margin in 2010.

Of course, just because a few of these companies aren’t very profitable doesn’t mean they’re not brimming with profit potential. Look at Amazon.com. Launched in 1995, the company didn’t make money until 2004! But last year the company’s net profit was well over $1 billion and it is now threatening Walmart’s retail dominance.

In other words, a lack of profits today doesn’t a bubble make (necessarily).

And as Mashable columnist Jolie O’Dell notes, today’s tech climate is much different than those heady days in the late 1990s and early 2000s, when you had hundreds of startups with half-baked ideas and flimsy business plans getting crazy opening day valuations. In 1999, the peak of dot-com mania, there were 308 IPOs. This year, by contrast, there have been 25, and lots of of them have been mature businesses with healthy revenue (e.g. LinkedIn).

O’Dell notes another key distinction between now and then: Internet usage. Back in the 1990s, relatively few people were online. According to the Pew Internet and American Life project, Internet adoption has practically doubled among adults since 1999. Today 77 percent of American adults are online. Among teens, the figure is over 90 percent.

In the dot-com era, investors swooned for companies that didn’t have any users. The users weren’t even there. Today is unique. Examine Twitter. Sure, it has fought to turn a profit, but at least it has a large, influential and expanding customer base. You couldn’t say the same for Pets.com, one of the biggest flops of the dot-com era.

But it’s still tough to say with certainty whether today’s enthusiasm is rational or irrational. Again, return to Google News. You’ll see good arguments on both sides

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