Andre Gide once wrote: "Everything has been said before, but since nobody listens we have to keep going back and beginning all over again." I have been covering Bubble 2.0 since March 2011, when I argued that there were micro-bubbles in tech but nothing comparable in scope to the original 1995-2000 dot-com bubble. Since that time, the stock market has been on a tear and tech valuation multiples have continued to increase. I now believe that we are in a full-on tech bubble.
SaaS valuation multiples are as high as 39x revenue [Workday (NYSE:WDAY)], first-day IPO pops of 50+% have become common, and the aggregate market cap of all (665) public US-exchange traded technology sector companies exceeds $4.39 trillion (according to Screener.co, as of 2/18/2014) -- more than 4x the estimated contribution of the entire information and communication technology industry, including private companies, to US GDP in 2008 (source). While there are fewer high-multiple megacap, tech names, there is a robust "IPO pipeline" of privately held companies, with high-multiple $1B+ valuations, just waiting for the right time to go public. We may be in the equivalent of 1998 rather than early 2000, but the bubble is well under way.
There is no longer talk of a "new economy," but that phrase has been replaced by "software eating the world" just as all the "please god, just one more bubble" bumper stickers in the valley seem to have been replaced with gaggles of new Tesla Model S cars. The "gold rush" mentality has driven up rents in San Francisco to higher levels than Manhattan while the strong demand and limited supply of software engineers has caused entry-level top-tier developer compensation to once again far exceed entry-level top-tier investment banker pay.
While industry luminaries like Marc Andreessen continue to dispute that we are in Bubble 2.0, I believe that the $16B (+$3B in retention incentives) acquisition of WhatsApp by Facebook (NASDAQ:FB) may be the Geocities moment of the new bubble. Just as the $3.6B acquisition of free home page provider Geocities by Yahoo (YHOO) in 1999 was a major milestone in the dot-com bubble, I believe that we will look at the WhatsApp acquisition in the same context of bubble 2.0. Like Yahoo's acquisition of Geocities in 1999, the high nominal value of the acquisition of WhatsApp was enabled by a wide-open IPO window and the inflated stock valuation of its acquirer.
There were three legacies of the first dot-com boom; a new class of ultra-wealthy entrepreneurs/investors who were smart enough to cash out at the top (i.e. Mark Cuban), a surviving cohort of tech companies that became industry powerhouses [i.e. eBay (NASDAQ:EBAY), Amazon (NASDAQ:AMZN), Priceline (PCLN), etc.], and the enormous wreckage left by dot-com failures (a closed IPO window, massive decline in angel and venture funding for startups, and devastated retail investor portfolios).
I am a geek, and tech evangelist, at heart and wish the status quo were sustainable, STEM professionals would remain the new rock stars, cheap money would keep flowing to tech startups, and the stock market would never go down. But, I also believe in intellectual honesty, and feel obligated to point out the obvious.
Let the debate begin ...
Note that I am not avoiding the tech sector entirely, as there are bargains to be found in even the most overvalued markets. However, investors should avoid tech companies with high valuation multiples, particularly those that embark on costly and dilutive acquisition strategies. Even though I previously saw some potentially attractive growth opportunities for FB, I would now avoid it. The "Levi's" of the current tech gold-rush (tech companies that sell enabling tech or services to other tech companies) are also risky plays.
While there is timing risk in trying to short the bubble, I have occasionally bought a small number of cheap far-out-of-the-money puts in some of the most overvalued tech names [WDAY, Tableau Software (DATA), etc.]. That has proven costly in the past, but may be something I would consider doing again in the future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: My company buys self-serve advertising using Facebook Ads and Yahoo Stream Ads.