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Dot Com Bubble Bursting V2.0?

10 years ago or so, the entire market suffered a major decline, which was mostly caused by a huge decline in the Nasdaq Index. Why? Internet companies such as Pets.com, Boo.com, InfoSpace, Broadcast.com, ended up being subject of huge hype that led to sky high valuations. It went higher led by momentum, analysts such as Henry Blodget pumping up the stocks despite the knowledge that these companies weren’t worth crap, etc. It all ended in a train wreck and within months, dozens of these companeis were worthless or had suffered huge losses. A few such as Amazon (AMZN) which had declined to $7/share eventually recovered but for the vast majority, there were many big losers, especially among retail investors…

It Was Obvious All Along

These companies did not really have a business plan, they were trying to get as many eyeballs as humanly possible knowing that would be enough to have investors believe in the potential. In those days, that is what it was all about.

Web 2.0

After the first online generation that had been led by websites, search and other features, we are now in what is commonly known as web 2.0 where social rules, where Facebook is the king followed by other social players. Companies are now focused on their Facebook pages, their Twitter accounts, etc. It’s not so much about making it profitable as it is to have a social presence in case someone proves that you can earn money from it.

tech-bubble.jpg

Cartoon from the economist.com

Bubble Bursting 2.0?

It didn’t take long to see a few names that have started to suffer. Just take a look at these charts from Facebook, Zynga, Groupon and even Netflix, these newer players that have been collapsing.

FB1.png

ZNGA.png

GRPN.png

NFLX.png

It’s Not The Same Story

I’d argue though the story is very different this time around. First off, when you look at a company such as Facebook (disclosure, I am long Facebook), it is profitable and while it’s true that I think much of its valuation depends on other revenue sources that it will be able to generate, the company is already profitable and trading at multiples that would be high but not bubble like even other revenue sources do not come to fruition. I guess both Groupon and Zynga also have their own stories.

Groupon has been questionable from the very start as I had written about while Zynga has been suffering from a lack of hits and a general growth slowdown. Netflix on the other hand has been described as a falling knife on this blog and while I still think it will be able to fight its way back, it faces more competition than ever from the likes of Google and Amazon.

I would argue that apart from Groupon, these companies are all fairly sound and while some are fighting to remain profitable, they do have actual revenues, a business plan, are not spending millions of dollars on Super Bowl ads, etc

Where Do We Go From Here?

Not all stocks have been declining and while some from the older generation such as AOL (AOL) and eBay (EBAY) are making comebacks, others like LinkedIn (LNKD) are also doing very well. Just take a look:

LNKD.png

Is LinkedIn the next to go? Or perhaps Demand Media? It’s difficult to say but I personally don’t believe in the “bubble theory” this time around. Very few of these companies could be reasonably expected to go out of business or have severe financial problems anytime soon.. I’ve already explained why I believe in Facebook and the idea that Facebook’s fall is a sign of a bubble collapse is laughable in my opinion

What are your thoughts? Are we in the middle of a tech stock bubble? Or has the collapse already started?


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