Advancing a Free Society

Another Tech Bubble in the Offing?

Monday, May 30, 2011

The dotcom boom at the end of the 1990s was a classical and magnificent bubble. Venture capitalists and other investors were throwing tens, and often hundreds, of millions of dollars at Internet startups and fledgling biotech companies that usually were not making profits, and frequently did not have any sales. The bubble burst in 2000, and the huge valuations placed on these companies disappeared, along with many of the companies.

It is only a decade later, but a second dotcom boom has begun, and some early signs are surfacing of a possibly another bubble. This boom is being fueled mainly by social networking companies like Facebook, Twitter, and LinkedIn, and also by Chinese Internet companies. Other Internet companies, like the Internet phone and video company Skype, are also in the mix. Microsoft recently purchased Skype for $8.5 billion, which is ten times Skype’s sales, and several hundred times its operating income last year.

During the dotcom frenzy of the ‘90s, tech companies that were traded publicly, usually on the Nasdaq, had greatly inflated valuations. Share prices were often immediately bid up by more than 100% after tech company shares started trading on public exchanges.LinkedIn is one of the few social networking companies that have had an IPO, and its market value already has soared. LinkedIn started trading on the New York Stock Exchange on May 18 at a share price of $45 that valued the company at about $4.3 billion. Its price rose the next day to close at $86 per share, almost double the offering price. It now trades at around $88 per share. The company had revenues in 2010 of about $243 million, but indicated in its filing that it did not expect to make profits this year.

Continue reading Gary Becker at The Becker-Posner Blog

(photo credit: reechard.walker)