Those of you who watched the LinkedIn initial public offering may have experienced a strange sense of deja vu. The social media company was offered to the public at $45 a share, and an unexpected buying frenzy took the price up 171% on the first day of trading, before the company settled back to just over $94 a share–more than 109% above the offering price. By that valuation, the Mountain View, CA company is worth nearly $9 billion, more than the Harley Davidson motorcycle manufacturer and Moodys Corp., the rating agency. Does anybody hear echoes of the Dot-Com bubble, when shares of Amazon.com were briefly trading at a valuation greater than the gross domestic product of Iceland?
A recent article in The Economist says that we are indeed flirting with a new tech bubble. Secondary market trading in Facebook (which is not publicly listed) values it at roughly $76 billion, more than Boeing or Ford Motor Corp. Microsoft recently purchased Skype, the internet calling and video service, for $8.5 billion, about ten times its sales last year and 400 times its operating income. A photo-sharing social network called Color was recently said to be worth $100 million, although its service is as yet untested.
A longer evaluation in the same issue of the Economist points out some other similarities to the Tech Bubble: an underlaying digital revolution, enthusiasm feeding on itself, vaulations going through the roof, analysts using “alternative” valuation measures that pay little attention to actual earnings and people talking about their stocks at the barber shop. However, other voices are saying that the new technology transformation is making it easier and cheaper to “try out” ideas, plus there are plenty of corporate buyers with the deep pockets to buy up these start-up firms and test them out. Last but not least, there is the rapid globalization of the world.
The article ends with an important reminder via a quote from Steve Blank (a former serial entrepreneur who teaches at Stanford), “every bubble is a game of musical chairs.”