Editor’s note: This article was first published in October 2013, a month before Twitter’s IPO; the day’s share price falls and the valuations are from that date. Twitter was later taken private by Elon Musk in 2022 and renamed X, and Microsoft bought LinkedIn in 2016.
Jonathan Krinsky has put the fear into investors with a report comparing four tech companies with some of the companies whose valuations, at the end of the 1990s, were warning of a possible bubble.
In this case, Krinsky has sounded the alarm about four companies which, in his view, have been driving the market higher in a very dangerous way. They are Facebook, down more than 6% today, Tesla, which is losing 4%, Netflix (-4.5%) and LinkedIn (-7%).
According to Krinsky, the market will put these companies’ valuations in their place, and that place is well below where they are now. Remember that some of these companies trade at as much as 141 times earnings, a P/E ratio that is far too high considering that they are not alone in the market and that many other companies are competing for their business, chasing profits that even they have not yet achieved.
At the end of the 1990s, according to Krinsky, the companies whose valuations were worrying and raised the alarm about a possible bubble were Cisco Systems, Intel, Microsoft and Dell.
It is against this backdrop that Twitter plans to go public with numbers that are worrying, to say the least, not least because Twitter is losing money and its IPO might not help it generate recurring profits, even though it is one of the companies best adapted to mobile, an apparent advantage over its rival Facebook.
Of course, Twitter’s advertising business, and its ability to generate revenue from advertising, raises a lot of doubts (at least for me personally).
Meanwhile, the news from Silicon Valley is no more encouraging.
Silicon Valley is already creating more millionaires than Wall Street, with young entrepreneurs inventing intangible products that are sold for hundreds of millions or billions. Sam Altman, a venture capital investor, says it is not a good idea to invest in new tech projects right now, because what we are living through is not so much a bubble as a frenzy, in which companies are valued highly with no real vision beyond an idea that many people find unsustainable. Even so, investors bet on them despite the risks, in case they have the next Jobs or Zuckerberg in front of them.
If a student creates an app that sells for 1 billion, that is great news. But if such deals keep happening, with startups being bought for millions every week, the situation is worrying, because many of these companies are being bought for far more than they are worth.
If thousands of young people with talent now want to go to Silicon Valley only to make a quick killing and get rich, we are in a madness we have already lived through, with credit, construction and so on…
Personal opinion
So far, small companies are being acquired by big ones, which on the face of it keeps the danger of a bubble at bay: as long as we build flats and people buy them, everything is fine. The problem would come when the big companies hit a ceiling and have to slim down, stop buying small companies, or pay less than they are worth.
People say that today’s tech companies are not like the ones that went bust in 2000. And that’s true, but it’s a long way from there to valuing companies at the levels they are being valued at now…
And in the stock market it really doesn’t matter whether or not we are in a real bubble (which is probably in the making). All it takes is for the rumour and the fear to spread, and the market takes care of making it real.
Twitter’s IPO will show us how much madness, or how much pessimism, there is about new tech listings.
Twitter will probably mark a turning point for the internet giants: whatever the outcome of its IPO, tech investors will do some serious thinking.
Featured image: Frank Schulenburg, CC BY-SA 4.0, via Wikimedia Commons.
