Sunday, February 20

Dotcom Bubble 2.0 in Tech Stocks ?

Stocks and Shares - Dotcom Bubble Hot Stocks Part Deux

If you missed out on the dotcom bubble on the stock market between 1995 and March 2000, or if you didn't miss out and wish you had, as your profits evaporated and floated off to money heaven, then fear not, you may get a second chance !

Warren Buffett notoriously would have nothing to do with the dotcom stocks, likening them to "pretty pink cotton candy (candyfloss) covering over a dirty brown stick" (actually, in the spirit of the dotcom stocks, I just made that quote up) but certainly the Oracle of Omaha didn't get rich by buying companies that don't make a profit.

The beauty of the dotcom bubble was that stocks with no product would go up 10% a day, day in day out, for no reason ! It was a lot of fun, until it all went to pot.

Well anyway, I have been watching CNBC and noticing how they are starting to talk about tech companies again, they have pointed out on a number of occasions that certain tech stocks have gone up 100% in a few months etc... In fact, I thought I had noticed a distinct trend rather reminiscent of the good old days. Well it seems I'm not the only one. back in December Newsweek wrote a piece on Dotcom Bubble 2 - http://www.newsweek.com/2010/12/03/lyons-dotcom-bubble-the-sequel.html - and the Gnuradian/Observer in th form of Dominic Rushe in New York - dotcom bubble 2 - has just published a rather interesting article mentioning something rather similar.

Apparently an anthropologist no less has been given money to study the technology startup community. That should set bells ringing for a start. In addition, it appears there is a new silicon rush under way as people too young to remember the last dotcom feeding frenzy (except perhaps visions of their father going prematurely grey and collapsing in a useless blubbering heap on the floor) dream of becoming billionaires from a new generation of "Internet" companies. Mmmmmmm Internet companies.

Ms Farai, the anthroppologist, says the boom has just begun. "People who not long ago started startups because they couldn't get a job are turning down jobs now, (because they prefer working from their garage on start ups)" she says. "There's so much money about. The idea that your idea could be the next big idea is very real. There's a real air of excitement." So much money about ? After the greatest economic collapse in living memory ?! Well apparently so.

Sky-high valuation time seems to have returned. Zynga, the virtual vegetable company aka FarmVille, has been valued at $9bn - to be fair I think they do actually make some money with their games, but edible virtual food would be nice one day.

Twitter, no profits, is apparently worth $10bn. Groupon, online discounts, turned its nose up at $6bn from Google and is contemplating a stock market a flotation at $15bn.

According to tech-watchers (see the subtle information being passed on that they are back) - tech-watchers, this is just the beginning. The starting pistol will be when Facebook, (more eyeballs than Google) goes public, probably sometime next year.

It has in fact emerged that "Facebook staff are planning to sell $1bn of private shares at a price that values the private company at $60bn". Lol - 60 billion dollaros for a company that lets people display their dirty washing for all to see - no doubt they make a pile in advertising but still we can see how the valuations are being bandied about again.

For comparison Ford is worth $55bn and Visa $63bn. But Google is valued at around three times that.

Alan Patrick, co-founder of Broadsight, says we are seeing the first signs of another bubble "A bubble is defined by too much money chasing assets, greater production of those assets, then the need to find a greater fool to buy them." Ah yes, the greater Fool is on his way back (yes, greater fools looking for kwik bux are predominantly male in my experience) - but if you've been here before then you can watch out for them and stock up on some choice assets before the bubble really starts expanding. Time to fill yer boots again ?

Mr Patrick, kindly lists 10 tell-tale signs that a bubble is bubbling (to which I have added my own pearls):-

1. A "New Thing" appears that cannot be valued in the same way as old things (think Tulips !). People who should know better (if the cap fits) start paying over the odds for "New Things". (Without knowing what they are, what they do, and why they are worth so much).

2. Smart people notice the start of a bubble (oo are we there already?). The apostles of the "New Thing" outdo themselves in superlatives and make ever more glowing claims.

3. Startups with founders considered to have "pedigree" (e.g. former employees of New Thing companies) get funded at extreme, not to say ridiculous, valuations for next to no apparent reason.

4. New investment funds shoot up like hallucinogenic mushrooms in cow pats catering for startups.

5. Companies get funded based on how snazzy their PowerPoint presentations are - actual products are stricly optional.

6. MBAs desert banks to start up their own firms.

7. The "big flotation" happens.

8. Banks make a market in the "New Thing" (banks are so prudent and wise, they make sure they get their fees and bonuses up front), by investing your pension money.

9. Taxi drivers start offering advice on what stocks to buy. (For the anecdote this is apparently what caused the 1929 stock market crash when a shoeshine boy gave the CEO of a bank - all names left out because I can't remember them - a stock tip. The CEO thought to himself "this is fishy" and promptly gave the order to "sell everything" thus causing an almighty crash. During the last dotcom bubble, I personally heard of one one normally broke middle-class guy who announced one Friday afternoon to his wife "honey we made $55,000 this week." "Is that all" she replied with a slight yawn. The bubble burst the very next week.)

10. A "New Thing" darling buys an old-world company for stupid money. It's time to cash in your chips and invest in bricks and mortar.

This time round the "New Thing" is social media (which I must admit I've always found incomprehensible). There are claims that Twitter and Facebook are a revolution in human communications unseen since Gutenberg started baking cookies.They don't make any money, but strangely they are worth a fortune (rather like cookies).

Stage 1 - Arianna Huffington, Ms HuffPo, and Michael Arrington, Mr TechCrunch, have both sold out to AOL, hmm that sounds strangely familiar.

Stage 2/3 - Fred Wilson, Union Square Ventures, pointed out that Quora, a questions-and-answers site that raised $11m in funding last year after the company was valued at $86m. is now allegedly refusing offers of $330m. "In days gone by, the rule of thumb was that a company with two or three employees would be valued at $5 million or less. But “today in the early-stage market we’re seeing two- and three-person teams that are getting $30 million, $40 million, $50 million valuations, and I think that’s not right,”

Stage 4 - David Cohen,MD of start-up fund TechStars, says there is a bubble in the number of companies financing startups.

Not everybody agrees. But then there were many people during the first dotcom bubble that were willing to explain just how valuable these new companies were.

Ms Farai, the anthropologist, says "There are elements out there that are pyramid-esque, Ponzi-esque, maybe even Kafkaesque. There's a sense that this isn't real money. In the long run, that can't be good." Lol - indeed.

If they are already at stage 4 in the USA then we are probably a bit behind here in the UK.

Having vivid memories of what happened last time, I would advise caution if tech shares do start rocketing again (the Nasdaq still has a lot of catching up to do compared to the DOW and the SandP by the way) and watch out for the crash at the end - if memory serves me right the actual crash started with an almighty rush upwards not downwards ! I distinctly remember a number of tech stocks spiking up around 25% in one day for absolutely no reason and in hindsight that was the time to get out and stay out !

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