Why We Really Are in a Tech Bubble

It took long enough. Fifteen years after the dot-com bubble, the Nasdaq finally hit a new record high Thursday. And yet the earnings parade was a real mixed bag. Microsoft (NASDAQ:MSFT) and Starbucks (NASDAQ:SBUX) beat across the board. Amazon (NASDAQ:AMZN) beat on revenues but swung to a loss. Google (NASDAQ:GOOGL) missed on both revenues and profits.

Funny thing is, the market could care less about fundamentals. All four stocks were up after hours: Microsoft 3.3%, Starbucks 4.1%, Amazon 6.8%, and Google 3.4%. Did I forget to mention that all four stocks were up during the regular trading session and for the week, as well? Well they were.

What does it all mean? It means nobody wants to hear me talk about the tech bubble. Nobody’s listening. Nobody cares. The topic bores them. And you know what? I’m sick of talking to an ambivalent market. OK, fine. Put a fork in me, I’m officially done talking about the bubble.

Never mind that, of the 50 technology stocks I follow, 22 are in the red, two have P/Es over 1,000, six have P/Es over 100 and 15 have enormous price-to-sales ratios well in the double-digits. Wait, am I boring you? Sorry about that. I guess old habits die hard.

So what shall we talk about? Should we talk about how Netflix (NASDAQ:NFLX) has a P/E of 129? How with every passing month it’s becoming more and more normal to talk about the new metrics of monthly active users and subscriber growth instead of real fundamentals like net income and free cash flow?

Should we discuss how the Wall Street Journal counts 83 startups valued at $1 billion or more – almost twice as many as last year – including nine over $10 billion? How there are 588 venture-backed technology companies with $100 million valuations in the U.S. alone, according to CB Insights?

Maybe we should talk about how, in addition to valuations, the burn rates and funding rounds are getting completely out of control. How five of the 10 biggest U.S. venture capital rounds of all time took place in 2014? How VCs are desperately chasing these enormous deals like personal-injury lawyers chase asbestos and mesothelioma cases?

Wait, there I go again. Sorry, didn’t mean to bore you.

In his popular blog Above the Crowd, Bill Gurley of Benchmark Capital points out that investors who used to specialize in specific rounds or types of funding don’t seem to think that sort of discipline should matter anymore. They’re crossing into each other’s lanes and “rushing in to the high-stakes, late-stage game,” he says.

Even traditional late-stage investors who should presumably know better have, according to Gurley, “abandoned their traditional risk analysis” for fear of missing out on these highly competitive and coveted shareholder positions. He calls this entire phenomenon “the defining characteristic of this particular technology cycle.”

Gurley says we’re not in a valuation bubble as much as a risk bubble. You say tomato; I say tomahto. Whatever. Regardless of what type of bubble anyone thinks we’re in, I will grant you there are differences this time around. But why should that come as a surprise? The last bubble was 15 years ago. That’s like a century in Internet time. Of course there are differences.

But there is one fundamental aspect of today’s market that is remarkably similar and that’s the key to understanding why we are in a tech bubble.

Back in the dot-com days, you heard a lot of people say “we’re in unchartered territory,” “there’s no precedent,” and “old rules no longer apply.” Those same people assumed that market demand for Internet products and infrastructure was essentially infinitely elastic. That assumption turned out to be remarkably flawed.

Today, I hear a lot of people say a lot of the same things. Most of them were teenagers around the turn of the millennium so they don’t know what a bubble feels like. They talk about monetizing MAUs and subscribers in much the same way that their predecessors talked about the infinite demand for Internet bandwidth.

And the assumption that companies can justify their valuations by virtue of the possibility that they may monetize all those users at some point in the future is likewise remarkably flawed because, if they all did, we would be counting the same limited number of eyeballs and wallets a thousand times over.

Besides, this is not a robust economy. Consumers are in record debt. America is in record debt. We’re in way over our heads. If the underlying growth fundamentals are not there and the sky-high market is the only thing keeping us from drowning in all that debt, that spells bubble in my book.

If only the monetization of consumer’s eyeballs and wallets were infinitely elastic, today’s private and public valuations might be justified. Sadly, they’re not.