Tech Bubble Part Deux?

By on May 1, 2012

As the technology sector continues to pump out impressive growth quarter after quarter, there’s a ton of persistent chatter about the dark side…

It’s mostly about an epic, big budget sequel called The Return of the Tech Bubble. With so many IPOs launching in the past year, most of them tech companies, it’s pretty easy to see why some are worried.

If you’re an investor, it’s your job to worry about overvalued stocks. I mean, this wouldn’t be the first time we’ve seen tech stocks go mountain climbing based on massive, unbridled optimism, only to go splat.

But this time it’s different…

You may recognize these as the famous last words that have sent many investors and business owners to the poor house, but that doesn’t mean they’re not true.

The tech industry is light years more mature than it was in 1999, folks. One of the biggest reasons for that is the crash of 2000…

Investors are much less willing to drink the koolaid than they were during “Tech Bubble Part 1.” Case in point, Groupon’s underwhelming stock performance. Since it’s IPO, Groupon has been getting hammered for being immature and overly optimistic. CEO Andrew Mason recently said his company needs to “grow up,” he even personally apologized for drinking too much beer.

Another reason things are different in 2012 is that the tech giants now have proven business models, with massive earnings. Consider the very healthy, not very bubble-like, P/E ratios of a few of the major players.

In a recent blog post, Chris Dixon highlighted the surprisingly not sky high numbers: “Apple (14 P/E), Google (18 P/E), eBay (16 P/E), Yahoo (17 P/E).”

Why It Looks Bubbly

I’m not saying that there isn’t a little bubble psychology at work out there, especially with the IPOs. People get carried away with the excitement of an IPO like Facebook’s and think they’re going to flip the stock for major profits in only a few months. That’s just speculation…

I hate to break it to you, but there will always be speculators going bust in any economy.

The other reason some people are seeing champagne in tech stocks are the recent big splash acquisitions of Instagram and Draw Something. You can argue whether or not Zynga made a mistake by purchasing Draw Something, but it definitely didn’t cause Zynga’s stock to skyrocket on the NASDAQ — even though the purchase doubled Zynga’s active users.

Likewise, Facebook’s $1B purchase of Instagram was widely viewed with suspicion, not glee. For the markets, that’s healthy.

Actually I think both of these controversial acquisitions were probably very smart moves — and moves that even smaller entrepreneurs can duplicate. To learn more about WHY, you’ll have to check out the Limitless Growth column in May’s DM Pro Newsletter.

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