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Three Reasons Why We Are Not in Another Tech Bubble

Three Reasons Why We Are Not in Another Tech Bubble

A tech bubble is a rise in the stock markets ascribed to speculation in technology stocks. When rapid share price growth alongside high stock valuations exists based on metrics like price/earnings or price/sales ratios, a tech bubble is said to occur. Certain patterns exist in the stock market that show what happens before a bubble can be declared. By looking at these patterns, expert analysts can predict whether another bubble is close to occurring or not.

With a growing interest in technology stocks there have been assumptions that the market is on the verge of another tech bubble (the last having occurred in the late 1990’s early 2000’s). However, based on the patterns of previous bubbles, including the tech bubble, the hecould you use the numbers don’t seem to match up with this notion.

Price/Earnings Ratio Too Low

During the first tech bubble, the S&P 500 in the US had a price/earnings ratio of 29 based on 12-month earnings in January 2000. This same ratio was at 19.8 in late 2013. This number has gone up since the reports from the previous year (14.9 in January 2012) but the current level still doesn’t show that there is over-valuation of technology stocks.

While the ratio from the first tech bubble and the current reported price/earnings ratio don’t seem far off from each other on a number line, the distance between them in terms of stock valuation is significant enough that it dashes the idea that we are in the midst of another tech bubble.

Number of Tech IPOs Too Modest

The number of tech IPOs (initial public offerings) directly affects the market and whether or not another tech bubble can occur. According to Morgan Stanley, during the last tech bubble (1999) 308 tech companies went public and began to trade on the stock market. As of 2013 around 30 IPOs went public this number is way off the mark to declare another tech bubble.

This doesn’t mean that there aren’t a number of new tech stocks that aren’t getting attention, nor that the tech sector isn’t driving growth. Twitter’s IPO, for example, saw a lot of attention when it went public. However, the numbers are still too far off in this sector.

Tech Companies Actually Make Money

In the dot com crash, one thing was painfully clear with retrospect: many of the companies with multi-million dollar valuations on the NASDAQ and FTSE just were not making money. They literally made no money. At all. None.

Compare that to today. It couldn’t be any more different. Apple makes billions of dollars every quarter. So do Google. Recent listings like Facebook are showing that they can generate serious revenue in mobile. They’re on a hiring spree too: don’t take my word for it, just take a look at the number of positions open on Randstad Financial Services and any number of online job boards.

Popular Media Bubble Fever Absent

As with anything else, the media attention on a given subject helps drive a tech bubble. During the original tech bubble dot-com stocks were all the rage and were constantly featured in the media in one form or another.

For example, in December of 1999 Jeff Bezos from Amazon was on the cover of Time magazine and featured as its man of the year. Lately, there isn’t this kind of media attention. Outlets have other top stories like government crises (Crimea), scandals (numerous), and other hot topics (celebs getting married, again) controlling the content. While smartphones and social media get their fair share of media attention, it isn’t enough to fuel a tech bubble.

Without this attention, speculation and valuation of tech stocks can’t reach where they have to be in order to facilitate a tech bubble.

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