Monday, February 19, 2007

Simmering, if not bubbling

Provocative piece from John Naughton in yesterday's Observer on the evidence for TechBubble 2.0 (see previous posts).

Naughton notes two phenomena. First, the almighty Google:
On 31 January, for example, the company announced fourth-quarter profits that had nearly tripled ($1.03bn profit on a 67 percent jump in revenues to $3.2bn) This indicates a year-on-year growth rate of 70 per cent. And yet the main consequence of the announcement was a 2 per cent drop in the share price to $494, which suggests that investors had expected even better results. If this isn't bubble thinking then I don't know what is.
Second, the massive multiples being paid for social networking and user-generated content tech:
Colossally inflated valuations are an infallible indicator of a bubble. In the late 1990s, dotcom start-ups with 50 employees and zero profits were briefly valued at more than the market cap of Fortune 500 companies. In 2005, Rupert Murdoch paid $649m for MySpace and eBay paid $2.6bn for Skype, a VoIP [internet telephony] company. Last year, Google forked out $1.65bn for YouTube. Such valuations provide terrific incentives for ambitious geeks because the new web services require less upfront investment than the original dotcoms. What is YouTube, after all, other than some smart software for converting every uploaded video clip into a Flash movie, plus server capacity and bandwidth? Skype adds 150,000 subscribers a day and buys almost no hardware because it uses its subscribers' computers to do the heavy lifting.

All fair points, and I certainly agree there's plenty of bubble-like behaviour going on. Opinions do vary though. I'm writing a piece on the tech M&A market for Corporate Financier at the moment, so talking to a lot of sector advisors. Some acknowledge that there are some 'headscratching valuations' being paid at the moment, but note that these aren't feeding through into the mainstream of deals. Most are all-paper deals (as many of deals were in the dotcom bubble, of course). Others take the opposite view, with one saying: "There's absolutely no evidence of any bubble at the present time. It could be argued if it's erring anywhere, it's on the side of caution... There's absolutely no evidence of a bubble and I can't see anything happening to dramatically upset the balance in 2007."

It'll be fun seeing how it all pans out again.

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