Four reasons why we’re in another tech bubble (and why that doesn’t matter)
At the start of this month, the NASDAQ hit 5,000 for the first time in 15 years. It was a significant moment; it was only the second time the US stock market, home to a host of the world’s publicly-traded technology firms including behemoths like Apple and Google, had hit that milestone. The last time was just before the dotcom crash of 2000.
This latest stock market milestone caused the perennial question asked by tech experts to rear its head again: are we in another tech bubble? I often posed this question myself in my old job as a tech reporter. And my answer is still the same: yes, we are. Here are four reasons why that’s the case – and some reassurance as to why we shouldn’t worry too much.
1. There are so many bloated valuations
Brands like Snapchat and Uber have risen from nowhere in the last 18 months to become prominent services in our digital lives. Both recently raised weighty rounds of VC funding – and investors slapped them with some hefty valuations. Snapchat, a four-year-old company with revenues of next to zero, having only just started its attempt to turn its popularity into dollars, is valued at between $10 billion and $20 billion by its investors (depending on which reports you believe). Uber is much further along the money-making trail, with an estimated annual revenue of more than $1 billion – but its latest valuation is 45 times that figure.
Both companies have created strong digital brands, there’s no doubt about that. Snapchat has amassed more than 100 million active users in seemingly no time. And while Uber keeps its numbers close to its chest, it’s certainly disrupting the traditional taxi market and is now active in more than 50 countries. But investing is all about the financial figures – and the reported valuations just don’t make sense in light of what we know about the pair’s revenue. It seems you can put a price on potential.
2. Profit remains elusive for many startups
Online vehicle pricing service TrueCar and customer service software provider Zendesk were two highly anticipated initial public offerings (IPOs) in the tech sector last year. But the pair are finding it tough to turn a profit. Zendesk’s $67 million loss in 2014 was three times its 2013 deficit, while TrueCar’s $48 million net loss was nearly double 2013’s figure.
The companies’ struggles are mirrored across the wider industry. Growth is the name of the game for many startups – and even larger players like Amazon are in the red thanks to extensive investment in their future. The losses are warning signs that went unheeded in 2000, when companies like Drugstore.com and Pets.com went public while hemorrhaging millions of dollars – but their stock continued to rise, at least initially. A glance at the stock markets shows that the share prices of TrueCar and Zendesk have been more measured this time round, but the absence of profit is still a concern.
3. We’ve already seen sharp rises – and even sharper falls
The tech industry is littered with companies that burned brightly, but fizzled out just as quick. Groupon is the most high profile of these, with companies like mobile games developer Zynga and, most recently, Angry Birds creator Rovio, following in their footsteps.
The daily deals website quickly became one of the hottest digital brands around, with millions of consumers snapping up savings. An IPO followed in 2011 with Groupon valued at more than $12 billion dollars – despite the fact it was yet to turn a profit. The brand’s user growth didn’t last – in fact it took a brutal turn for the worse. Simply, consumers quickly tired of their inboxes being bombarded with often irrelevant deals and deserted the service. Groupon has spent the intervening years attempting to broaden its business model, like offering holiday deals – and a recent $43 million deal to buy digital fashion startup Ideeli hints at a move into yet another new industry. Groupon’s now worth less than half its IPO value and is still struggling financially, losing $73 million in 2014.
4. Established players are “jumping the shark”
The era of wearable technology. The age of the “Internet of Things”. The media is falling over itself to usher in these new trends – but is there a demand for them? Do consumers want their fridges to tell them when their milk’s turning? Is there really an appetite for T-shirts that gauge our heart rate?
Established tech giants are forging on regardless. Philips has an internet-connected toothbrush. Apple launched the Apple Watch to the excitement of the media, but until pre-orders open in April the jury’s out on how successful it will be. Google embarked on an extensive testing programme for its augmented reality specs, Google Glass. But the search giant shelved the project in January amid concerns that the head-mounted gadget was invasive. The project’s chief Astro Teller remarked this month that he was “amazed by how sensitively people responded to some of the privacy issues”. I’d argue that if a greater portion of the project’s multi-million dollar cost went into consumer research, then the findings wouldn’t have come as such a surprise.
But it’s a different bubble this time…
I disagree with Shark Tank star and serial investor Mark Cuban who argues that this bubble is worse that its predecessor. Or, more accurately, I disagree with the specific wording of his argument. The bubble could well be worse – for private investors and venture capital firms. But that’s nothing new; the payoff is always in the exit – and investors know that.
For society as a whole, however, the future looks more secure. The stock market looks unlikely to crash – those that are succeeding are generating meaningful revenue and those losing money can rest assured the losses they’re recording are a fraction of the deficits posted by previous dotcom failures like MVP.com and Pets.com. Giants like Intel and Google have enough in their corporate coffers to swallow any financial impact that a burst bubble might cause to them (Google’s VC arm, Google Capital, has invested in 57 companies in the last 12 months, Intel Capital has invested in 59).
The fundamental difference for me is that technology is no longer a new, siloed industry. It’s engrained in every aspect of our lives – everything is digitised in some way. We all use Netflix, surf the internet on our phones, buy goods online, and connect digitally with friends and peers. We can’t go back. Sure, businesses will rise and fall, but technology is here to stay.
For all the doom-mongers prophesising another disastrous crash: I hate to burst your bubble.
Drew no longer works at The Frameworks
- Digital media
- Wearable technology
- Tech bubble
- Dotcom crash
- Stock markets