Recalling the heady days of the tech bubble, it seemed that anyone with a half-baked idea and a clever name could raise enough capital to fund the takeover of a small country, never mind the operations of a company with no tangible (and in many cases, not even in tangible) output. For example, according to Ljungqvist and Wilhelm in their paper 'IPO Pricing in the Dot-com Bubble',
In 1996, first-day returns on initial public offerings (IPOs) averaged about 17 percent (median: 10 percent). In 1999, first-day returns averaged 73 percent (median: 40 percent) before tapering off to 58 percent (median: 30 percent) in 2000. internet IPOs averaged a stunning 89 percent (median: 57 percent) during 1999 and 2000. These average returns dwarf those from earlier periods and are the most widely recognized feature of what is now commonly referred to as the 'dot-com bubble.'
LinkedIn recently went public for over $4 billion (and subsequently doubled). Twitter is being valued in secondary markets at about double that price. Not to be outdone, and as we have noted in a previous post, Facebook is being valued somewhere in the neighborhood of $70 billion. Not bad for a website that is essentially a virtual gossip session with photos. The question that is begging to be asked is, are we in the midst of a second technology bubble? The arguments in the negative range from the idea that investors would not allow such a thing to happen again (weak) to the exponential growth of internet users in China (only slightly better) to the idea that the current mini-boom has, thus far, only included best of breed companies with revenue (getting closer).
However, despite better and worse arguments suggesting that the market is not partying like its 1999 all over again, there are some indications that things could be overheating as well. These would include the fact that, despite all of the lessons of history, it is in the nature of investors to blow bubbles until they are unceremoniously pricked.
Additionally, the same Chinese market noted in optimistic growth calculations is incredibly regulated and restricted. Keeping on the Asian theme, there are also reports that China is currently in the midst of its own tech bubble, providing evidence that the old cliches about American fads becoming fashionable 10 to 15 years after the fact don't only apply to Germany anymore. Finally, though the companies gaining attention now are the best of the best rather than merely anyone with a clever name, their valuations compared to earnings do feel at least a tiny bit stretched.
For more on these ideas from better economists and thinkers than we can claim to have on staff, visit Judge Richard Posner's piece 'Is There a Social Network Bubble?' here and Gary Becker's 'Another Tech Bubble in the Offing?' here. Finally, for analyst arguments on both side of the coin along with a brief history, visit NPR's piece 'In LinkedIn IPO, Hints of Another Tech Bubble?' here.