The Bubble's True Size Is Hidden
An op-ed over at the New York Times by Ruchir Sharma yesterday is asking what is increasingly becoming a very real fear by tech stock watchers. It’s a very well written article that I’d recommend reading in its entirety.
It is true that prices today are not quite as widely overvalued as in 1999. Large technology stocks are up 350 percent this decade, the low end of the range for the hot stocks from earlier booms, which saw gains of 300 to 1,900 percent. Only a few select technology companies — mainly the internet giants — are trading close to the valuations of the dot-com era, when the average price-to-earnings ratio for tech companies hit 50. The average ratio for that sector today is 18.
However, the scale of today’s tech boom is not readily visible because much of the investment action has moved into the hands of big private players. In 1999, nearly 550 start-ups went public, and after many ended in disaster, the government tightened regulation of public companies. In part to avoid that red tape, this year only 11 tech companies have gone public. Many are raising money instead from venture capitalists or private equity funds. Venture capitalists have poured more than $60 billion into the technology sector every year for the past three years — the highest flows since the peak in 2000 — and private equity investors say there has never been a better time to raise money. -Ruchir Sharma, New York Times
Ruchir highlights the fact that since tech companies today have shifted their method of raising capital, that old metrics like PE Ratio are not an apples-to-apples comparison. The true scope of the bubble is hidden.
Companies like Apple (AAPL) and Google (GOOG) that are self-sustaining entities will be OK in the long term because they aren’t dependent on the equity markets. But unprofitable startups like Tesla (TSLA) will get washed away in the flood. New investor capital is the oxygen that they breathe and when new money stops flowing in, trouble ensues.
Now available in iBooks —> The Tesla Bubble
However, the scale of today’s tech boom is not readily visible because much of the investment action has moved into the hands of big private players. In 1999, nearly 550 start-ups went public, and after many ended in disaster, the government tightened regulation of public companies. In part to avoid that red tape, this year only 11 tech companies have gone public. Many are raising money instead from venture capitalists or private equity funds. Venture capitalists have poured more than $60 billion into the technology sector every year for the past three years — the highest flows since the peak in 2000 — and private equity investors say there has never been a better time to raise money. -Ruchir Sharma, New York Times
Ruchir highlights the fact that since tech companies today have shifted their method of raising capital, that old metrics like PE Ratio are not an apples-to-apples comparison. The true scope of the bubble is hidden.
Companies like Apple (AAPL) and Google (GOOG) that are self-sustaining entities will be OK in the long term because they aren’t dependent on the equity markets. But unprofitable startups like Tesla (TSLA) will get washed away in the flood. New investor capital is the oxygen that they breathe and when new money stops flowing in, trouble ensues.
Now available in iBooks —> The Tesla Bubble
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