Home prices are up 20% this year in parts of Silicon Valley. Not only is there a tech boom going on, it is accelerating. Employees of companies that recently went public (or are about to) can afford to bid up home prices. Bidding wars are happening again. Homes sometimes sell for more than the asking price. Those who live in areas where real estate prices are stagnant or still dropping can only look at Silicon Valley in wistful wonder.
The current Silicon Valley tech boom is being led by social networking companies, most of whom are enjoying stratospheric valuations, even as their net profits are either non-existent or tiny. Investors, speculators, and hedge funds alike are bidding up stock prices based on estimates of future growth and profits.
If any of this sounds familiar, it should. This is of course of what happened in the previous tech boom with the first wave of Internet companies. Everyone was expecting enormous future growth because surely revenue would continue soaring at near-vertical rates and this would somehow magically transform into whopping profits, although no one was quite sure how.
As examples, Yahoo peaked at over 120 and is now about 15, Broadcom zoomed to over 180 then tumbled to 33, and JDSU spiked to 1,200 (that’s not a typo) then cratered to 16. Those numbers mask a whole lot of pain for investors, and these were companies that survived. Many others didn’t. Their stock price went to zero.
The following are some of the companies that have recently gone public or plan to:
Groupon: $20 billion valuation, no net profit yet. That’s right, they’ve yet to make a profit.
Zynga: $15-20 billion valuation. Revenue is soaring, but profits are tiny. They make games played on Facebook and thus are completely dependent upon that company. Plus, like with Hollywood and movies, you are only as good as your last game.
LinkedIn is making a small net profit and recently went public. The stock soared, plummeted, then zoomed up again, and in general acts like someone with bipolar disorder.
Twitter has no IPO plans but is raising money based on a $7 billion valuation.
The 800 pound gorilla known as Facebook will probably go public early next year with a valuation of about $100 billion. Facebook is profitable, but not at a scale to justify a valuation that large.
I use all these companies and hope they grow and prosper. But their valuations and the expectations of continued astronomical growth should make anyone twitchy. Sooner or later, growth will slow. It always does. Or the new kid on the block moves in and disrupts things (Stumbleupon now delivers more traffic to US websites than Facebook).
This time isn’t different. It never is. Tech bubbles are great for those who get in early then cash out while the bubble is still expanding. But they are terrible for those who get caught holding stock that plunges in value or who don’t even own stock but work in impacted industries.
We are seeing the beginnings of another tech bubble, and it will probably continue for a while. But the end result will likely be the same as all bubbles before it.