9 Comments

Summary:

Apple’s market cap is edging towards $250 billion, Facebook is being valued at anywhere from $20-$50 billion, game maker Zynga is reportedly worth $5 billion, and VCs are said to be circling startups like Foursquare with offers of $100 million takeouts. Are we inflating another bubble?

The Nasdaq Composite Index is almost twice as high as it was a year ago. Apple shares have also doubled in value in the past year, and its market cap is edging towards $250 billion, making it the third most-valuable company in the world. Meanwhile, Facebook is being valued at anywhere from $20 billion to $50 billion, game maker Zynga is reportedly worth $5 billion, Groupon just closed a financing that values it at $1 billion, and corporate buyers are said to be circling startups like Foursquare with offers of $100 million takeouts. Are things getting a little too bubbly in the tech sector?

Seth Goldstein thinks they might be — the angel investor and founder of SocialMedia.com and Stickybits says that his “spider sense is tingling” and that he feels “something big is about to pop, something on the AOL-buys-Time-Warner richter scale.” He writes:

I remember that Monday morning, January 10, 2000. The day that AOL announced it was buying Time Warner…I was working at Flatiron Partners, and Fred, Jerry, Bob and I had a standing Monday morning breakfast at the Mayrose Diner. We all looked at each other that Monday morning with our mouths agape, shaking our heads in amazement that this was really happening. In retrospect, that deal was a watershed for the Internet. It announced that new media was going to be bigger than old media. It also marked the final inflation of a bubble that popped painfully only a few months down the road.

So are we brewing another bubble of AOL-Time-Warner-like proportions? It’s probably a little early to be ringing the alarm bells, as even Goldstein admits. Facebook and Zynga and Foursquare haven’t even gone public yet, so whatever excessive valuations are occurring (if they are) are happening out of the public markets and in the rarefied air of private venture capital. It’s true that the impetus of those valuations frequently spills over into the public markets and can wind up taking retail investors along for a nasty ride, as it did in the late 1990s, but we are not even close to being there yet. And while the Nasdaq may be up 100 percent from last year, that was a recessionary low — the index is still barely half what it was before the blowout of 2000.

That said, it is worth being reminded of how these bubbles are inflated: a breath of venture capital air here, another over there, and soon the process has taken on a life of its own. Goldstein’s former Flatiron Partners colleague and prominent tech VC, Fred Wilson, says in a comment on the post: “I remember that morning at the Mayrose, Seth. It is gone now, as you know, but Internet mania is not.” We should keep that in mind as we count our virtual Facebook, Zynga and Foursquare winnings.

Related content from GigaOM Pro (sub req’d): Did We Really Learn Anything From the Dot-Com Crash?

Post and thumbnail photos courtesy of Flickr user zachstern

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  1. Just to point out, Fred is a likely winner of the current frothiness. Look at his portfolio. I still like that he keeps it real!

    1. Yes, that’s a good point — bubbles are great, provided you are on the right side of them when they pop :-)

  2. I think it is important to try and step back to try and guage if we are in a bubble. After all, there is much recent history that this should be fresh in our minds.

    However, it is tough to look at Apple doubling as a strong indicator that we’re in a bubble. AAPL got run down WAY farther than made sense and wound up at an unreasonably low price. Apple, even during the downturn, never stopped delivering fantastic quarterly results and introducing desirable products. It would probably be more fair to look at AAPL rise in share price compared to the pre-collapse stock price (around $200). The 35% run-up (270 vs 200) is still a large one and the increase in stock price in the last week alone is jaw-dropping. Apple has a price-earnings ratio in the low 20’s while it just reported a 49% increase in revenue and a 90% increase in net income (Q2 2010 results).

    Is this an indication that we’re in or heading to a bubble, I don’t know. But, it is healthy to discuss it.

    I’m long in AAPL.

  3. Matthew, I see the point you’re trying to prove with this article. A bubble? Maybe. But Matthew, you just can’t put Apple in that basket. You can’t compare Apple with Zynga, Groupon or even Facebook. Come on! $13 billions in revenue for a non-holiday quarter, about 4 in profit. $42 billions in cash. iPad out-selling predictions. A new server farm for I don’t know what new upcoming service. 25 new Apple stores in China where 2 millions of iPhones were just sold and counting! Do I need to continue? Even though Apple rely heavily on hit products, which is hard to sustain, they have the cash and the vision to adapt their way for the future. Actually they’re creating it. They’ll just do what it takes to remain on top. In fact, we’re getting to the point where they no longer need to release new hit products. All pieces of the puzzle (short of TV) are in place. Now they can milk the ecosystem – services, content, cloud, iWork online, apps, etc. Their business model is real, tested, working and generating billions quarter after quarter. What else do you need? If you say Facebook, I say OK. They are said to be making money – from virtual gifts for instance. They have a huge potential to change the web as a whole. But still, “potential” is way far from “cash accumulation”. In that regards, Apple shouldn’t have been in your article.

  4. Brian S Hall Friday, April 23, 2010

    Hey, Matthew,
    don’t harsh my cool; the 401K is kicking ass this year.

    1. Sorry, Brian — just ignore me and go back to counting your virtual millions :-)

  5. Everyone thought the value of their home had nowhere to go, but up too. Do we look back at the experts who towed that line as oracles?

    Value is “emotional” only until reality sets in and, historically, that day always comes. Fervor actually hastens the process. As others drool over Apple, be nervous and diversify.

  6. Sanjay Maharaj Friday, April 23, 2010

    I dont’ think that you can call it a bubble in the making. Apple continues to innovate and make money, lots of it as they continue to blow their projections.The likes of Facebook, Zynga are real bussinese models making real money as opposed to the hype of business models with no real ways to make money the last time the tech bubble burst.
    Markets like companies which innovate and make money and Apple is a prime example and as long they do that I don’t see any bubble in the making

  7. Frothy Times for Web Angel Investing Tuesday, April 27, 2010

    [...] For some, this kind of frenzied, frothy atmosphere will be all-too-reminiscent of the dot-com bubble 10 years ago. At this accelerated pace, it’s possible that the shortest recession ever could be followed by the shortest boom. [...]

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