Dot Com bubble repeating itself?

(Originally written and posted on June 14 2011)

Was the year 2000 really that many technological generations ago that we’ve forgotten how volatile the tech markets are? Is history really going to repeat itself so soon despite how many of us got burned such a short period ago? If there was any doubt left in anyone’s mind about whether or not we were in another tech bubble, these past few weeks have easily squashed misguided thoughts.

For those of you who are not familiar with what a tech bubble is, Investopedia describes it as a pronounced and unsustainable market rise attributed to increased speculation in technology stocks. (http://www.investopedia.com/terms/t/tech_bubble.asp) Most notably, was the big dot com boom of the period stretching from 1995 through to 2000. When the bubble burst, several very successful companies at the time went bankrupt. For example, GeoCities was sold to Yahoo for $3.57 Billion in 1999, and was later shut down. Another example, InfoSpace’s stock value reached $1,305 per share in March 2000, only to fall to $21 per share one year later. Does anyone remember America Online?

The last few weeks have shown very distinct signs that history is repeating itself, only one decade later.

On May 19th, LinkedIn, the successful business-oriented social networking site, went public with an initial offering of $45 per share. In their first day, the stock value rallied up as high as $122 per share, finally settling at just below $80 per share. This put the value of LinkedIn at $7.5 Billion. In 2010, they only posted a net income of $15.4 Million. How is it possible that a company this young and experimental, with net income of only $15 Million, could possibly be worth $7.5 Billion?

With the success of LinkedIn’s public launch, other dot com businesses are coming up to bat. Groupon, the controversial “deal of the day” coupon website, has filed for approval on their IPO set at $750 Million dollars. This, considering that they are losing $117 Million per quarter! Even though they posted a total revenue of $644 Million, they are bleeding $117 Million every quarter! Think about this... It costs them $1.43 for every $1 they make, and they believe they are worth $750 Million on the market?

And then today, Facebook announced that they were preparing their IPO worth $100 Billion dollars. $100 Billion. This value is completely fictitious; it’s a value that someone pulled out of a dream comparing their own user base to other sites such as LinkedIn and their initial offering success. In 2010, Facebook’s revenue was less than $2 Billion, and their net income was roughly $200 Million. They are definitely profitable, but they are not profitable enough to make them worth $100 Billion. At this rate, it would take 500 years for them to save up that much money. Facebook would be lucky to survive 10 years. Now it could be argued that they are simply testing the waters, because Facebook is very good at throwing things into the public and planning their next moves based on the public’s reaction (usually the reaction is negative). We also know that Mark Zuckerberg likely would never want to take the company public because, based on his social skills, he would quickly be pushed out of the CEO position once it did become a publicly traded company. However, they likely know themselves that we are in a tech bubble, and by liquidating several billions of dollars worth of their company, when the bubble does bursts that money will remain in their control. So although Zuckerberg likely does not want to take his company public, he also likely knows that he needs to cash in his chips before the cards turn sour.

Tech stocks are always volatile. Any company can lose their value over night if another company emerges with a better product. This happens daily. But to value a single company with this kind of revenue at such fictitious numbers is absolutely ridiculous.

These are simply three examples. There are other Dot Com companies that are following down the same path, for example Spotify, that are grossly overvalued without a balance sheet to back them up. If history has taught us anything, the tech industry need to maintain a sustainable growth to ensure that we don't run into another tech market crash like what was experienced in 2000-2002.

- Mark Bass