“It’s Official: We Are In a Tech Bubble. That was the March 11 headline in Fox Business News. Tech veteran Steve Tobak asked, “How can an industry full of so many brilliant and innovative people–an industry I was once a proud part of–make the same eminently self-destructive mistake twice?” And his answer: “They can. And they are.”
“Warning signs are flashing on Wall Street.” Tthat was the more modest headline in the March 27 USA Today. As reporter Adam Shell put it: “After the stock market’s best year since 1997, warning flags are starting to go up on Wall Street where stock turbulence is on the rise and froth is being rubbed out.”
“In Some Ways, It’s Looking Like 1999 in the Stock Market.” That was the March 29 headline in The New York Times. As reporter Jeff Sommer observed, “It sure looks like a bubble.”
In the tech sector in particular, there’s been plenty of froth, plenty of partying like it’s 1999. In that year, those with long memories will recall, the tech-heavy NASDAQ nearly doubled. Indeed, the following year, 2000, the NASDAQ peaked at 5048. But then the bubble popped, and the NASDAQ tumbled by three quarters in the following 30 months.
Since then, it’s been a slow climb back–followed by a fizzy spike in the last year: the NASDAQ hit 4357 on March 5. But since then, worn down by the slow economic news–the unemployment rate, announced on Friday, is still 6.7 percent, and job-creation numbers are weak–and battered by all those bubble-popping headlines, the NASDAQ has drifted down by about five percent; it closed at 4127 on Friday.
Still, tech is high. Facebook stock closed at 56 on Friday, half again higher than its 2012 IPO; the company’s market capitalization is $144 billion. And Google stock is at 545, indicating a worth of $367 billion. Even Yahoo has made a big comeback: its stock has more than doubled in the last year three years. And while the Dow Jones Industrial Average has increased 149 percent since its low in March 2009, the tech-heavy NASDAQ–whose listings include Facebook, Google, and Yahoo–has soared 219 percent.
So for sure, we are in for a small correction, but are these values still so out of line that we could see a full-fledged bubble-pop? That was the question asked by New York magazine. As reporter Kevin Roose observes:
Tech writers theorize about bubbles for lots of reasons: because they’re bored, because it gets clicks, because they’re annoyed by Silicon Valley hubris, because they remember 1999, because they see stamping out hype as being in the public interest, and because they want to be seen as prescient if a bubble does pop.
Having dutifully cited the conflicting opinions of bulls and bears, Roose turns it over to the reader: “Get to doomsaying or cheerleading, as you see fit.”
So what’s the answer? Bubble or not?
Let’s consider, first, the biggest tech news of the last two weeks–namely, Facebook’s $2 billion purchase of Oculus, the head-mounted virtual reality (VR) display company. By some measures, the deal was frothy–doubly frothy.
On the buy side, Facebook made the purchase with $400 million in cash and $1.6 billion of its own stock–which, by the way, is up 153 percent since its IPO in May 2012. And on the sell side, for all the buzz about its wondrous potential, Oculus VR has yet to release an actual product to consumers. The hope is that its Oculus Rift headset will go on sale later this year–or maybe it will be in 2015.
But Facebook founder and CEO Mark Zuckerberg is thinking big, as he takes his company, always a software player, into the realm of hardware. As he explained in a statement about the Oculus purchase on his (where else?) Facebook page:
Oculus’s mission is to enable you to experience the impossible. Their technology opens up the possibility of completely new kinds of experiences.
And new kinds of experiences, of course, mean new kinds of markets–and profits.
Zuckerberg continued, “Immersive gaming will be the first.” That is, Facebook/Oculus could soon be competing with videogame consoles, such as Microsoft’s Xbox and Sony’s Playstation. And videogames, of course, are a huge market; by some reckonings, they are bigger than Hollywood.
But wait, there’s more! Zuckerberg continues:
After games, we’re going to make Oculus a platform for many other experiences. Imagine enjoying a court side seat at a game, studying in a classroom of students and teachers all over the world or consulting with a doctor face-to-face – just by putting on goggles in your home.
This is really a new communication platform. By feeling truly present, you can share unbounded spaces and experiences with the people in your life. Imagine sharing not just moments with your friends online, but entire experiences and adventures.
These are just some of the potential uses. By working with developers and partners across the industry, together we can build many more. One day, we believe this kind of immersive, augmented reality will become a part of daily life for billions of people.
If Zuckerberg can pull this off, then he and his VR products will not only be competing with all entertainment and media companies, but also be crowding into the space of just about every company, period. That is, Facebook’s VR could be a part of any interface with consumers–from advertising, to training, to customer service.
Indeed, Facebook and VR capacity could be vying with governments and all other organizations, public and private; anything that’s connected to the Internet will be part of the coming Internet of Things. Social media and Big Data are already central to e-commerce; now, VR could be central to our very existence.
Of course, Facebook won’t be the only player in this rapidly expanding field; Microsoft has reportedly purchased a VR designer. Indeed, every other tech company–new and old–will be seeking, as well, to find its place in the VR ecosystem.
In this coming struggle, Zuckerberg has a huge advantage, of course, in his huge pile of cash and his network of a billion users. However, he still faces the challenge of integrating Oculus into Facebook, and he faces the further challenge of introducing VR to his billion Facebook users without either scaring off the older users or boring the newer ones. As Facebook is already discovering, it’s hard to be both elder-user-friendly and youthfully cool.
So in the years to come, Facebook could go up, or it could go down; the stock is, after all, pricey. Its price/earnings (P/E) ratio is almost 100, which puts it roughly five times the overall NASDAQ P/E, and nearly seven times the Dow Jones P/E. Which is to say, Facebook, a truly excellent company, will have to continue excelling, lest its stock price fall back to the range of the merely normal.
Indeed, the NASDAQ as a whole could go up or down, because in the endless psychological struggle between portfolio-greed and portfolio-fear, it’s never possible to know which emotion will prove to be the stronger.
Moreover, we don’t know what sort of tax and regulatory changes will be coming, for better or worse. And what will be the net impact of the National Security Agency spy programs? Today, the NSA casts a shadow over the whole of the tech sector; as Zuckerberg himself wrote recently:
I’ve been so confused and frustrated by the repeated reports of the behavior of the US government. When our engineers work tirelessly to improve security, we imagine we’re protecting you against criminals, not our own government. The US government should be the champion for the internet, not a threat.
So yes, the tech sector is sure to be robust, because VR and the Internet of Things are coming. And if Moore’s Law continues apace, then the wonders will never cease–that is, quantum computing, 3-D printing, and, looming out there, the greatest bonanza of all, Big Data-powered breakthroughs in life-sciences. Yes, millions of people will stand in line to buy a new smartphone, but it’s billions who will stand in line to buy a new wonder-drug that cures, say, Alzheimer’s.
All these potentialities should be good for tech stocks. This current price rise, it’s true, might be a bubble–and yet if it is, it will likely be replaced, soon enough, by another bubble. Indeed, the history of stocks is that they are often a series of bubbles, to the point where the bubbles are simply another name for a long bull market.
Yet there’s still another question: Where? In which country’s stock market? Companies flourish, but in which part of the globe? It’s been known to happen that a booming industry starts in one country and ends up migrating to another. Nations as different as China, Israel, Japan, South Korea, and the United Kingdom are all eager to compete–and determined to win.
So yes, the stocks in some country’s tech-sector are going to go up, up, and away.
Meanwhile, the challenge for American voters–not only investors, but also job-seekers–is to make sure that a critical mass of this miracle-producing technology remains right here in the USA.