Widespread fears of a new tech bubble are overblown

Despite some crazed internet valuations, 2014 is not a rerun of 1999

An employee walks past a logo of Alibaba Group at its headquarters on the outskirts of Hangzhou, Zhejiang province. The Chinese ecommerce giant is about to file for an initial public offering (IPO) in the US, with talk of a $170 billion valuation. Photograph: Reuters

An employee walks past a logo of Alibaba Group at its headquarters on the outskirts of Hangzhou, Zhejiang province. The Chinese ecommerce giant is about to file for an initial public offering (IPO) in the US, with talk of a $170 billion valuation. Photograph: Reuters

Tue, Apr 29, 2014, 01:10

Chinese ecommerce giant Alibaba is about to file for an initial public offering (IPO) in the US, with talk of a sky-high $170 billion valuation fuelling fears there is now a dangerous bubble in technology stocks.

Is it 1999 all over again? Has the bubble already begun to burst, and might this have wider repercussions for the financial markets? Or is all this bubble talk wildly overblown?

Not according to Marc Faber, who recently warned social media stocks “are more overpriced than the internet shares were in year 2000”. Faber is known as Dr Doom, of course, but more moderate voices, such as Blackrock’s Russ Koesterich, cautions internet stocks are “back to a world reminiscent of the late 1990s”.

Renowned hedge fund manager David Einhorn warned last week of the “second tech bubble in 15 years”. Goldman Sachs admits that similarities between the recent tech sell-off and that of March 2000, when the dotcom bubble burst, have “dominated client discussions”.


Sell-off
That sell-off was tame compared to the days of old. Even before last week’s rebound, the tech-heavy Nasdaq’s 9 per cent decline meant it fell just shy of an official correction. That it bounced as soon as it touched its 200-day moving average adds weight to the bulls’ contention that this was simply a healthy pullback.

However, this was no run-of-the-mill pullback. The Nasdaq suffered its worst week since summer 2012, while biotech stocks received their biggest one-day pummelling in 30 months.

Momentum stocks that have led the market higher were especially hammered. Twitter fell by more than 40 per cent from its December high; Facebook lost almost a quarter of its value in a matter of weeks; Amazon and electric car maker Tesla fell a similar distance from their 2014 highs.

In the UK, recently-listed online delivery service Just Eat fell from £2.93 to £2.25 in a fortnight; online retailer AO World fell from £2.93 to £2.25; another online retailer, Asos, fell from £72 to below £43; online supermarket Ocado fell below £3.30 after peaking at £6.23 in late February; fashion website Boohoo. com fell from 72p to a low of 45p.

It was an accident waiting to happen. Twitter, not expected to make a profit until 2016, was valued at more than $40 billion, and still trades at an indispensable-looking valuation. Facebook, worth more than $150 billion, trades on over 100 times earnings. Amazon, though strong and profitable, trades on more than 550 times earnings, or 57 times estimated earnings.

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