Technology is partying like it’s 1999. In 2013, there were 45 initial public offerings (IPOs) in the sector, the most in 13 years.
Facebook’s purchase of internet messaging service WhatsApp last week for $19bn – more than the value of firms such as Marriott International and Southwest Airlines – made 2014 the strongest start to a year for tech deals since the dotcom bubble peak in 2000.
And there are plenty of signs of irrational exuberance. “No algorithm based on terrestrial mathematics can make [the WhatsApp deal] compute,” says Robert Cyran on Breakingviews.
WhatsApp has 55 staff, 450 million users, and only gets revenues ($1 a year per user) from some of its customers – it won’t say what proportion. It has foresworn advertising. But Facebook doesn’t care, says Cyran. Apparently “growth is the point, not making money”.
If you think that sounds like the kind of thing dotcoms used to say a few months before they featured in MoneyWeek’s old ‘dotcom disaster of the week’ slot, you’d be right.
Back then, there was talk about ‘revenue per eyeball’ and other dodgy metrics. Now social networks are trying to establish as big a presence as possible among consumers and worry about how to turn their land grab into profit later.
Valuations are getting ridiculous. Twitter recently reached 32 times sales. This kind of multiple implies that a firm is guaranteed to dominate its global market for the foreseeable future, as Leonid Bershidsky notes on Bloomberg.com, yet in social media, barriers to entry aren’t high. And it’s not just social media.
Stuart O’Gorman of the Henderson Global Technology Mutual fund points to early-stage tech stocks, such as software company Tableau, which has reached 722 times earnings. IT data analyser Splunk is on 355 times. “The similarities with the last time are quite striking.”
Yet so far, “the froth remains contained”, says James Mackintosh in the Financial Times. Currently 14 stocks among America’s top 1,000 sell for more than ten times sales and book value and 20 times earnings. In 2000, there were around 80.
These stocks have solid stories and are dominated by three sectors: social media, biotech and online shopping. This group has been driven up by investors desperate for growth in a lacklustre post-crisis recovery.
We are only in the 1999 stage of the bubble, with investors fearful of missing out starting to rush in. “In a true bubble, shares would double or triple from here.”