As things improve in the business and investment world, speculation has begun about whether we are experiencing true growth or a bubble. From 50,000 miles away it might look like a bubble the likes of 1999, but when you take more than a cursory view, it is clear that we are not in an investment bubble, but there are bubble companies among us.
Saying there is an investment bubble implies there is too much investment happening and most, if not all, investors are getting carried away. We are a long way from that. Although the number of IPOs has slowly begun to climb, they aren’t nearly what they were before they fell off a cliff in 2008. The chances of achieving the same momentum of IPOs during the Internet bubble are less than slim, not just because of market factors. In the past 12 years, investors have learned there is serious money to be made through M&A as well. An IPO isn’t always the best option, and smart, mature boards now assess which step is best for their companies.
There is a clear difference between a company that has received a lot of investment money and large valuation and one that has solid revenue or at least a defendable business model.
For example, Facebook is currently valued at $50 billion and although most people think of it as a social networking company, its real value is the large amounts of personal data to which it has access. To date, the company has not produced revenue comparable to its valuation. It seems hard to image that in its present format it could produce comparable revenue without leveraging its accountholders data. Given the company’s repeated disregard for its users privacy, it could happen, but so far it has not.
On March 27, NYTimes.com ran a great piece that illustrated the difference between 1999, when the valuation of 24 companies equaled $71 billion. Today, the valuation of 4 companies equal $71.3 billion. Among the 1999 were Juniper Networks, which currently has a market cap of $21.59 billion, and Agilent Technologies, which has a current market cap of $15.72 billion. These are more than respectable numbers. The NYTimes.com piece is worth a read and at least worth a look to view the illustrations of 1999 compared to 2011.
Clearly, a bubble does not means the companies involved are actually worthless; it just means someone thinks they are worth more than they should be. It is likely that just as in 1999, not all the companies that comprise today’s bubble will be around years down the road. Of course, the difference is there are fewer companies this time around.
No one can accurately predict a bubble. If they could, it would be easy to navigate around them. For now, there is a handful or so of companies with valuations that seems hard to maintain.
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