Tech: Inflated like it’s 1999

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

 

Try this: Check out Google News and key in a search for ‘tech bubble.’ You’ll get 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 related to increased speculation in technology stocks. A tech bubble is highlighted by rapid stock price growth and high valuations based on standard metrics like price/earnings ratio or price/sales.”

 

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

 

Scanning the current headlines, we now 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 the very least eleven billion articles 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 2011 (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, simply 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 business didn’t make money until 2004! But last year the company’s net income 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 ridiculous opening day valuations. In 1999, the height of dot-com mania, there were 308 IPOs. This year, by contrast, there have been 25, and many of which have been mature businesses with healthy revenue (e.g. LinkedIn).

 

O’Dell notes another significant distinction between now and then: Internet usage. Back in the 1990s, relatively few individuals were online. According to the Pew Internet and American Life project, Internet adoption has nearly 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 different. Examine Twitter. Sure, it has struggled to turn a profit, but at least it has a large, influential and growing 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 eagerness is rational or irrational. Again, return to Google News. You’ll see good arguments on both sides