Wall St fuelling new dot.com bubble

Allister Heath
WITH the benefit of hindsight, bubbles are shockingly easy to spot. From Dutch merchants staking fortunes on the price of tulip bulbs to Chinese investors fighting for empty properties, the idiocy is always self-evident – eventually. At the time, however, it seems to make perfect sense to throw good money after bad. Somewhere deep in their psyche, human beings want to delude themselves that the world really is different this time, that they are just that much cleverer than everybody else and that eternal economic laws no longer hold. Unfortunately, such sentiments are invariably and depressingly wrong.

Hence why I worry – and why my own bubbleometer starts flashing red – when I see that Groupon, a two and a half-year old US website which specialises in digital coupons and discounts, is being valued by its backers and advisers at $15bn-$25bn. This can’t be right. Wall Street venture capitalists, investment bankers and fund managers are getting carried away again. In many cases, they are right to be excited – the new generation of tech start-ups are generating lots of revenues. They are closer to Google and Amazon than to the duds launched during the 1990s dot.com bubble. There are a great group of viable smaller firms in the UK too, based around London’s Silicon Roundabout (see p25). But that doesn’t mean that all sense of proportion should be lost.

In 1999, when the dot.com bubble was at its most extreme, 308 tech firms floated in the US, netting Wall Street a cool $1.3bn in fees. Morgan Stanley calculates that the combined valuation of the 24 largest US tech firms floated that year was $70.96bn. Since then, the world has changed radically and for the better for tech firms. But it is nevertheless ominous that the four biggest new dot.coms on the block – Facebook, Twitter, Zynga and Groupon, all privately held – are being valued at a combined $79-89bn.

Facebook, valued at $50bn, is the dominant member of this new generation of firms. It may even eventually be worth its price tag given its surging revenues – but that assumes it retains its market share. Twitter is being valued at $4.5bn; it remains to be seen how good it will be at generating revenues and profits. It could thus easily be over-valued. Zynga, a social games developer, was founded in July 2007. It has already raised $219m, is seeking $500m more and employs 1,300 people. It expects revenues to reach $1.8bn and to make $630m in profits in 2011. The site is now valued at $10bn, which would not be that expensive if these profit numbers turn out to be correct (which of course is not certain).

Groupon has turned down a $6bn offer from Google. It is being valued at around $15bn, having raised $1bn, and hopes to eventually float for $25bn. Its revenues seem to have been $750m in 2010; the firm hopes these will reach $3bn-$4bn this year. But given that its competitors may be able to replicate its technology, such growth rates could easily turn out to be fanciful.

The internet has come of age. One reason why British retailers are suffering so much is because shoppers are migrating from bricks and mortar. But many investors are getting carried away again. Some of these tech firms will be huge; others won’t. Even the successful ones may be worth only half or a quarter of what their bankers are pushing for. This is not like 1999 all over again – but this new frenzy is not entirely rational either. We don’t need hindsight to tell us that.