Wall Street’s “Technology Bubble” 2.0

4/16/2012 8:23:52 AM

Description: Wall Street’s “Technology Bubble” 2.0

Investors have benefited throughout the years from trends that have almost magically lifted Wall Street from the doldrums to lofty heights. These usually involved a spike in the sales of a domestically produced commodity, like in the mid-80s when record auto sales drove the Dow Jones Industrial Average to post an all-time high of 2002 points in early January of 1987, or the years of prosperity in the market seen after World War II had ended. But historically, nothing came close to the investor fervor that began in the mid90s.

The Information Technology Bubble, or Dot Corn Bubble, began in earnest with the rapid popularity of the internet as a means of communicating, trading information and doing business. AOL and Netscape, among other service providers, were making it easier and easier for “regular” people to access the internet via any (somewhat) reliable computer and a phone line. In December of 1995, according to research from IDC, there were an estimated 16 million people with access to the internet—O.4% of the world population. By December of 1999, that number rocketed up to 248 million people, or 4.1% of the world population. Suddenly, there was a place with a worldwide captive audience that could be tapped for anything from book and CD sales to personal services or even banking. This captivated venture capitalists and investors alike and, coupled with low interest rates in the mid-90s, made funding a “technology” start-up easy.

Most internet start-ups at this time relied heavily on operating at a loss in order to gain market awareness. The seemingly endless potential that the internet possessed, however, along with the exponential growth of the “online population’ spurred investors to grab any and all dot-corn and “technology” companies that offered shares on the open market. Since it was nearly impossible to valuate these companies, investors became less cautious when choosing stocks to purchase, concentrating instead on the unreal returns that so many tech companies were generating. With this vast number of people getting “rich” in the market, regular investors who had traditionally only used a broker for investment decisions or kept money safely tucked in an index-based mutual fund were now speculating on shares of companies with horrid P/E ratios and zero revenues. When the market could no longer bear the nonexistent growth and these once promising businesses filed for bankruptcy, the house of cards began to collapse.

Companies like Pets.com, an operation with a high profile advertising campaign (the Dotcom Boom did not lack creative marketing) and plenty of recognition, saw $300 million in capital wiped away and a successful IPO wither into liquidation in under a year — ultimately becoming one of the symbols of the technology collapse. One by one, former darlings of the street like Kozmo.com (one hour delivery), Flooz.com (an attempt at establishing internet currency) and the notable Globe.com — one of the first ever social networking sites and a company that posted the largest ever first day gain of any IPO of any company up to that point — collapsed in ruins, hemorrhaging large amounts of cash and ruining venture capitalists as well as portfolios.

On March 16, 1999 as the first cracks were appearing in the Tech bubble, the Dow broke an all-time single-day record by rising almost 500 points in one day to 10,630. Less than a month later, the Dow suffered its largest one-day drop up to that point, falling 618 points or 5.66%. The effects were devastating and the DJIA, which passed the 11,000-point only in 2006, took a long time to recuperate.

Description: Wall Street’s “Technology Bubble” 2.0

And now, over a decade later, many analysts are seeing signs of a new technology boom. Indexes like the tech heavy Nasdaq Composite are pushing ever higher and investors have been happily pouring into companies showing record profits, like Apple Inc. (NASDAQ: AAPL) which has been showing ever increasing record profits on each quarterly statement, or companies that merely have the potential to reap enormous profits, like Facebook and its estimated $75 to $100 billion IPO. But, as philosopher George Santayana once declared, those who cannot remember the past are condemned to repeat it. Companies like SalesForce.com (NYSE:CRM) are trading at over $140 a share but have a market capitalization over 8 times its earnings. Pandora (NYSE: P), the online radio player and automated music recommendation service, doesn’t even have a PIE ratio, is not yet profitable and trades over 9 times its earnings (almost $14 a share).

Although not as egregious as it was in the late 90s, technology is once again becoming a trendy speculative instrument, irregardless of earnings.., or the lessons supposedly learned from recent history.

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