Tech Bubble 2.0 in Cloud Computing & Social Networking Stocks

Tech Bubble 2.0 in Cloud Computing & Social Networking StocksTech Bubble 2.0 in Cloud Computing & Social Networking Stocks

In 2013, almost 600 tech companies went public and raised fund around $101 million. As per CB Insight venture capital database, it was up by 20% over the previous year. Some alarmists are saying it is very similar to the ways the things headed over a decade ago right before the dotcom bubble burst and cite the flood of IPOs at exorbitant valuations as a cause for worry. In 1999 and early 2000, many dot-com companies went public at a breakneck pace. Most of them had very little revenue or never earned a dime even, but they had valuations worth billions of dollars. When everything cooled down, the tech-heavy NASDAQ fell by 77% from its March 2000 peak. The history seems to be repeated if you look back just two and half years.

The IPO from LinkedIn, Groupon, Facebook, Pandora, Yelp and Zinga and recent IPO from Twitter had a combined market capitalization of more than $180 billion. The tech firms that went public in 2013 till November, 73% have never earned a profit (27%of the tech IPO in 1999 were unprofitable). Some of the observers have concluded that these are heading off the same peak again. Again, some of the profitable businesses like Facebook, Zynga and others have serious issues with their business models and trouble is brewing. If we consider profit as the final key determinant we should know that in reality, earning figures are heavily manipulated through various accounting tricks on tax related issues.

Many experts are speaking frequently whether another Tech Bubble is on. They are worried of the rise in disruptive valuation and rapidly growing cloud and social networking companies such as Facebook, Splunk, FireEye, Twitter, and Workday with recent private company transactions like Google’s acquisition of Nest for 3.2 billion and Facebook’s offer to Snapchat for 3 billion. But many things are not same this time. Unlike the first dot-com bubble, many cloud and social networking companies of today have made enough money before going public. In 1997, when Amazon went public, its shares were sold at $18 per share and reported first net profit of $5 million in 2001, fourth quarter. The companies like Zynga reported earnings of $30.7 million before its recent IPO; similarly Groupon also earned around $688 million in revenues. “Bubble” happens when majority of people believe or invest on things based on a fundamentally wrong-headed notion–bubble is a mass delusion. The following points may convince you that the majority of the good Cloud & Social Networking Stocks are blooming practically.

If you go through the NASDAQ stock data base you will understand that most good technology company valuations are at historic lows. Here is a comparison of 1999 and 2013 tech IPOs on some key criteria:

 

1999

2013 Till November
Number of offerings

368

32

Median ratio of market value to sales

26.5

5.6

Average first-day return

87%

26%

Percent with less than $50 million in sales
(constant dollars)

64%

22%

Median age of companies

4 years

13 years

From the above table, it is visible that there are fewer IPO than 1999 with less intensity. Bid price was far less on the first day of trading. The ratio of price-to-sales was nearly one fifth in 2013. In 2013, the IPOs of cloud and social networking companies were more mature with more real revenue that came from real products. The bubble of 1999 was a result of irrational optimism far from sanity.

This is more evident from the P/E ratios which seem to be more reasonable than in 1999.

P/E ratio 1999 P/E ratio 2013
Microsoft

78

14

Texas Instruments

68

25

Intel

39

13

Apple

28

13

Comcast

28

20

IBM

25

13

Cisco

229

12

Bottom Line

With these data we firmly believe that we are clearly not in any kind of Technology Bubble –the best is yet to come. It is a good time to take advantage from the great opportunities in cloud and social networking companies stocks.

About the Author

Sandra
I am working as Editor in Chief for Financeninvestments.com. Writing on Financial Topics is my passion. You can find me on , Seeking Alpha Instablogs or join our Facebook Community, s. FNI is a great Community for financial bloggers and writers. Get everything you wanted to know about your finance and investment related matters such as mutual funds, banking, retirement, economics and much more.

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