Remember the Dot Com Bust? Back in 2000, more than $100 billion in venture and angel funding went to tech companies that were long on promises and hype and woefully short on actual revenue or profit. Well, after the stock market cratered and a relatively short recession set in, it seems that investors have forgotten the hype-heavy and heady days of the turn of the millennium. Today’s tech stocks are different. First, many tech investors believe that the most viable tech companies are racking up sales and profits. After all, the Dot Com Bust changed the rules, right?
Sadly, a quick look at the multi-billion dollar valuations of companies ranging from Box to Snapchat to Zynga reveal that investors are still too eager to drive up the valuation of companies that don’t make much money. In fact, considering the business models and short-term plans of many of today’s app companies, one would be hard pressed to figure out when these companies will actually make money. The selling point of the companies all focus on growth potential or expanding subscriber bases. Sound familiar? This is precisely the same ‘valuation method’ applied to most Dot Bust companies.
Another cause of concern for tech investors is the linkage between the valuation of non-public startups and public tech companies. App-based tech startups’ value soared when Twitter’s IPO took off and Facebook’s stock spiked up after an initial crash. Such linkages are dangerous because companies are very different from each other. Besides, this is precisely the same linkage that was all too common during the halcyon days of tech startups in 2000 to 2001.
Finally, given the fact that much of the valuation of tech stocks and hyped stocks are driven by cheap stimulus-fed liquidity, investors might be betting too much on hype. Fund managers are prone to take more and more risks due to their perception that the ‘safest’ bets are already gone. Not surprisingly, institutional investors’ money may be artificially inflating tech stocks’ share prices. It might not take much-maybe an interest rate hike or severe eurozone drama-to make the whole house of tech stock cards to collapse. This might just be the collapse that can trigger a market-wide implosion in asset prices.
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