02-Aug-2011 16:44

Bubble about to pop–again! Fasten your seatbelt

It would appear that there is widespread concern over investment risks far more complex and unpredictable than even those experienced in 1999-2000 dot-com bubble (and bust).

Over 75% of investment bankers worry that the multi-billion pound valuations of high-profile Internet companies simply are not justified...

Companies creating worry lines around City offices & investment houses include LinkedIn & Zillow, Groupon & Zynga, as well as Facebook, Twitter, Yelp and Foursquare.

In the last bubble, gullible investors sadly followed the crowds to invest in Internet companies with no track records - many of which smartly failed.

Today, wealthy individuals and institutional investors are betting big on a new generation of technology firms generating tangible revenues.

Much of the action is taking place in direct sales of large equity positions to big investors and in new private-market stock exchanges.

However, there is very little assurance that today’s highflying techie companies can sustain such worryingly fast breakneck growth.

One measure of the buying and investing frenzy is that investors are paying enormously inflated share prices for specific Internet stocks relative to their earnings, known as price-earnings ratio, or P.E.
Just one example: LinkedIn's share price relative to yield shows a (frankly ridiculous) P.E. of 1,196…
That compares with an average P.E. of 14.2 for the sector!

Investors are simply betting that LinkedIn, Facebook and the rest will continue to thrive and drive their share prices ever higher…

However, if, for example, Facebook's membership growth slows – or heaven help us... falls! - investors paying today's prices will lose out -- and in a big way!

Happily, unlike previous dot.com bubbles which was rather more broadly-based and over valued non-established businesses, this time around it appears to be a mini-bubble.

Some of the ‘new’ businesses are actually better established and it is only the social networking areas that appear overvalued, rather than the rest of the technology which, to some, actually appears undervalued.

Many would argue though that that once again common folk are investing in non-productive companies that have never earned a profit, instead of investing in businesses that make tangible products…

…& meanwhile, in the Far East and other emerging economies, investors and companies are building factories to make ‘real’ products.

Only time will tell of course, but fasten your seatbelts folks – this may yet be a bumpy road ahead...