Facebook, Twitter slump reopens questions on tech bubble

After the tech euphoria of 2013, the fast-moving sector has hit a speed bump.

The wobbly action of 2014 is still an open question: is this a correction, bear market or a bubble like the catastrophic dot-com boom and bust of 1999-2000?

By some measures, segments of the tech sector look to be over the top, even after recent slumps.

"There are some astronomical valuations out there," says Roger Kay, an analyst who follows tech companies at Endpoint Technologies.

"That is a little troublesome because it implies that some future technology that is not even tested has a value in the billions of dollars."

Facebook's market value is close to $150 billion, despite its spending spree including an eye-popping $19 billion for messaging service WhatsApp and $2 billion for the virtual reality company Oculus Rift.

Facebook's value -- even after a slump of nearly 20 in recent weeks -- is 50 percent higher than that of Boeing, with the social network trading at some 90 times its profits, compared with a more conventional 20 percent for the aerospace firm.

Twitter shares have tumbled some 40 percent since peaking last year, but the popular messaging platform still carries a valuation of $25 billion, despite never having posted a profit.

Some firms have been eager to get listed, including food delivery startup GrubHub, raising $200 million with a $2.6 billion valuation, and Candy Crush maker King Digital, raising $500 million and a valuation of more than $5 billion.

Among companies not traded on the stock market, valuations are high too. Snapchat reportedly rejected a $3 billion offer, while Viber, another messaging app, was sold to Japan's Rakuten for $900 million.

The tech sector has been volatile, with large swings in recent weeks. On the upside, Chinese microblogging group Weibo saw a 19 percent jump in its market debut. But King Digital lost 15 percent in its debut.

Dropbox, a cloud storage firm believed to be eyeing an IPO, has an implied market value reportedly of $10 billion as venture capital floods into startups. Airbnb, the online retal marketplace, is believed to have a similar valuation.

'Frothy,' not bubbly

According to the venture capital blog CB Insights, some $9.9 billion was invested in 880 deals in the first quarter of 2014, the highest level in more than a decade.

"The most frequent question we've gotten from the media is 'Are we in a bubble?'" says CB Insights co-founder Anand Sanwal.

"For the record, we've always said no, and we continue to maintain that view. Sure, things are definitely frothy in certain pockets, but a bubble, it is not."

Jay Ritter, a University of Florida finance professor, says the market is uneven with high valuations in some areas and more reasonable ones for older tech firms like Apple and Hewlett-Packard.

"Where there is concern is the social media area," Ritter told AFP.

Part of the reason, says Ritter, is the "winner take all" environment in social networking, in which a dominant player will emerge with higher profit potential.

"With many of these companies, one can make optimistic assumptions and justify a very high valuation, but as BlackBerry demonstrated, just because you operate in a winner-take-all environment, it doesn't mean that niche will always be there," Ritter said.

Still, Ritter said the situation is different from the late 1990s, with fewer companies seeing those astronomical values.

Art Hogan at Wunderlich Securities said some of the high-flying stocks have been hit hard.

Hogan said he sees some of the "irrational exuberance" seen in the bubble of 1999 but that the situation is not the same.

"It's not the same pace of IPOs and not the same kind of companies," he said. "They are more mature. Some are private equity-owned companies. Plus the IPOs aren't coming out at the very beginning of the growth cycle."

Growing into valuations

Fred Wilson at the venture capital firm Union Square Ventures said easy-money policies -- with near-zero interest rates for several years -- are part of the reason for bubble talk.

"It seems that investors are so starved for returns that they are willing to pay that much more for earnings that can grow quickly," Wilson said in a blog post.

Lou Kerner at the Social Internet Fund, an investment group focused on new tech firms, said the question of overvaluation has to be examined "on a company by company basis."

"You can see companies whose valuations are stretched," he told AFP. "Will they grow into their valuations? I think most of them can."

Kerner also said the new Internet economy creates a situation "where companies are gaining traction at speeds we've never seen before."

That explains the emergence of new apps and social networks which can be worth billions in a short period of time.

Kerner said he sees some of the "momentum stocks" losing 30 to 40 percent, not the collapse seen in the dot-com bubble.

"When the momentum dissipates you will see a downdraft," Kerner said. "I think that is healthy, that's a sign of a market that is working."