Early this month, the stock price of Google shot above $600 per share, and its meteoric rise shows no signs of stopping — despite the fact that the price exceeds the company’s actual earnings by a factor of 50.
Meanwhile Facebook was recently valued at $10 billion dollars by the investors at Microsoft. However, estimates place its annual revenue in 2006 only in the millions, nearly 100 times lower than its crazy valuation.
The list goes on and on, of course. Online advertising company DoubleClick, a rare survivor of the first dot-com bubble, was purchased by Google for $3.1 billion in April, while YouTube was acquired last year for $1.65 billion, also without a clear revenue model — i.e. one that could justify the purchase price.
Does “Web 2.0,” the latest darling child of Wall Street investors and marketing gurus, face a resurrection of the bubble that doomed so many solid and respectable corporations of the 90s (e.g. Pets.com)? Yes and no.
There’s no question that much of the speculation that’s happening right now is baseless and errant. Facebook might be increasing rapidly in value, but it is certainly not worth $10 billion dollars, and, without substantial changes to its current advertising-driven business model, it will likely never be. There are already signs of such investments collapsing around the industry. Take a look at eBay’s 2005 $2.5 billion acquisition of Skype, an Internet telephony firm. Skype’s ability to provide free international calls via the net makes it extremely popular, especially with people who travel or work abroad and want to stay in touch with family, friends and coworkers. The company reported 59 million registered users at the time of its acquisition, and it has grown to well over 200 million users since then.
However, eBay made the critical, “Web 1.0” mistake of equating popularity with revenue. Now eBay announced that it is taking a $1.43 billion charge on its purchase of Skype; former Skype CEO and co-founder Niklas Zennström has left the company and has told the press that — basically — eBay paid too much for his company. From a common-sense perspective, there can be only one response to this epiphanic conclusion: duh! Contemplating exactly how the acquisition of a voice-over-Internet company whose crown jewel is a free service (totally free, including advertisements!) helps an auction site make money was mystifying two years ago, and, judging by the current state of affairs, still is.
Despite all of this, I’m not sure that the current state of the technology — and more specifically, the web services — industry can be characterized as a bubble. Although Google’s incredible rise from an IPO at around $90 to nearly $700 three years later is definitely bubble-esque, you have to remember that Google brought in real revenue of over $10 billion in 2006, and all signs do in fact point to the continuing rise of the stock in 2007. Although we can debate to what degree the company is overvalued, its stock price is certainly not based on thin air. They have a solid business model, and their status as the number one search engine on the web puts them in fantastic position to continue their progress for years to come.
Similar cases exist for other companies, such as Apple, Inc. At a stock price of over $180, Apple also has a price-earnings ratio of over 50, and the company announced a 29 percent increase in revenue on Monday. Apple is enjoying massive popularity for its music players, which is also spilling over into its more established computer market. But the company has certainly crashed hard before and seems to be using that past experience to avoid tripping up in the present.
I don’t think that the alleged Web 2.0 bubble is going to pop explosively like its predecessor and lay waste to an entire industry. A more likely occurance would be a softer deflation, bringing stock prices more closely in line with the real underlying value of the companies — which in this case, is certainly not zero or less. As long as we can keep our Greenspanian “irrational exuberance” under control, we can defy gravity and ride this bubble to new heights, without falling painfully all the way back down to earth.