Are We In A Tech Bubble?
There are two questions we ask every month. "Am I really so lazy that I refuse to turn the page on my calendar? and "Are we in a tech bubble again?" (You can thank Uber's $50B valuation.) DC area experts tell us that we’re not, and here’s why.
Growth in consumer and enterprise spending on social, mobile and cloud computing justifies the recent valuations of companies, says FBR Capital Markets managing director and senior analyst Dan Ives. “As long as earnings substantiate the hype, you can’t call it a bubble.” But traditional tech companies like Oracle, IBM and Cisco are facing “massive headwinds” as IT spending goes toward the next generation of tech companies. So what tech sectors are the hottest? Cloud, cybersecurity, big data, social, digital marketing, mobile and consumer tech like wearables and lifestyle apps.
Tech isn’t in a bubble because the price/earnings ratio for tech companies in the S&P 500 is actually lower than the P/E for the S&P as a whole, says Information Technology and Innovation Foundation global innovation policy VP Stephen Ezell. Plus the tech sector is just at the cusp of seeing innovative breakthroughs in biotech, clean energy, and information and communications tech. He says to keep an eye on the Internet of Things, which some estimate could grow to an $11T industry by 2025.
New Atlantic Ventures managing partner John Backus says the dot-com bust of the early 2000s was really a business plan bubble, when only companies that looked good on paper were raising money and going public. Companies like Uber and Airbnb are real companies with real business models and scale. Even Snapchat is in the real business category, with people sending 500 million pics a day. Another big difference in this current tech economy is that recent college grads are realizing being an entrepreneur is a real career, which is a permanent change in society. John adds that he hopes local startups stay in the region, grow and become the buyers of other companies.
But there are worrisome trends, says University of Maryland management and entrepreneurship professor Brent Goldfarb. The rise of the Nasdaq has mostly been in six stocks: Amazon, Google, Apple, Netflix, Facebook and Gilead Sciences, according to a recent Wall Street Journal story. They continue to thrive, but other companies with high valuations are struggling with certain hurdles: Uber isn't able to use its US formula to grow in Asia, and Pinterest and Twitter have huge user numbers but haven’t figured out how to make money. He’s also concerned about the number of employees and entrepreneurs cashing out early from their businesses instead of hanging on until an exit, which will lead to greater risk taking.
Eli Dourado, who runs the tech policy program at George Mason University’s Mercatus Center, echoes the no-bubble arguments. He says if there were any sort of bubble, it would be in private VC markets. It's clear publicly traded tech companies are not overvalued in the way they were in the late '90s. Even still it's possible some startups aren't really worth the money they're raising from VCs, who are betting big on finding the next Facebook. “Maybe they're being overly optimistic about the possibility of creating new network effects.”
CompTIA research and market intelligence SVP Tim Herbert points out that in 2014, VC deals were 52% below the 2000 peak and the number of venture-backed startups was 45% lower. The number of IPO filings was 67% lower and stock market valuations are well below the dot-com peak. But he warns of an uptick in VC funding, with more dollars chasing fewer deals. “VC funding for software companies could soon match the 2000 peak.”