Is This Tech Bubble Any Different From the Last One?

MySpace went from zero in 2003 to $580 million sales price in 2007 (at a P.E. of 150), then four years later it was sold yesterday for $35 million. This is typical of Silicon Valley where a company often has a few glorious years and then quickly fades to obscurity. This is why Buffett won’t buy Tech stocks because buyers overpay for them so that an investment in them is not available at a fair price. The risk-adjusted value of tech stocks is quite low because of the risk of sudden obsolescence. Buffett said that in a 100 years airline stocks as group have broken even. This is an example of investors overpaying for an investment in a glamorous industry.

The current IPO Tech bubble is focused on Social Media stocks none of which can verify a reasonable, robust earnings history, and also they have ultra-high P.E. ratios. They definitely they can’t offer a corporate moat against competition. While there is a chance that Facebook could make money from selling targeted ads to its members there is no guarantee that the members would stay with Facebook if they burned out due to being bombarded with ads. 

So except for the unverified hope that Facebook might have a good business plan, the rest of the Social Media bubble reminds me of the 2000 dotcom bubble where lofty valuations were based on theories that instead of using earnings to value a stock they would value it based on “sticky eyeballs”! (“Eyeballs” refers to the number of website viewers). What happened to those eyeballs? They quickly lost interest, especially when asked to pay for something.

About the author

Don Martin, CFP®

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